Insolvent companies - who is to blame!
As the recession grinds on a different kind of boardroom dispute is coming into play. Whilst directors must act collectively, they ultimately take responsibility individually. Where a company has become insolvent, or even where it has just lost value, the board, the shareholders or the liquidator may start looking for somebody to blame. When this happens directors must make sure that it is not their head on the block.
The Board may seek out the weakest link and fire them as a token to soothe shareholder anger. There is little that a director can do in this situation except ensure that they pick up the appropriate compensation for their loss of employment.
Shareholders may look to sue the directors if they believe that the loss has been caused by their negligence or that they were mislead when they purchased their shares. A predicted explosion of D&O (Directors and Officers) litigation has, however, failed to materialise. English law does not provide an easy route in such circumstances and the greater flexibility of US law and its class action format means that aggrieved shareholders of RBS have taken to suing subsidiaries in the US rather than the UK. That is not to say that some shareholders will not put their money where their mouth is and bring a personal action or a derivative action on behalf of the company.
Finally, the Liquidator of an insolvent company will certainly be looking at the conduct of all directors prior to the liquidation. In this respect directors should be aware of the key considerations for directors of insolvent companies. A director who is not aware of their duties and the risks inherent in an insolvency situation risks much.
Tags: Boardroom Disputes, Insolvency
Boardroom Disputes, Shareholders disputes | Ed Weeks | 
April 17, 2009 8:03 pm
5 Comments
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By Saffron, April 23, 2009 @ 11:27 am
Surely you are advocating the wrong type of approach here in suggesting that directors should be looking out for themselves rather than acting in a collective way. If, at all times, directors act in the best interests of the company and shareholders and make sure that they keep proper records and can justify all their actions then that is all they need to do. They will then not be open to accusations of acting improperly etc. However, if, as you advocate, they are taking a butt-covering attitude and putting their own fears and personal situation first then they are much greater risk of getting into the sort of trouble that you are talking about.
By Ed Weeks, April 24, 2009 @ 6:27 pm
Saffron - I agree that directors should act collectively. However, in an increasingly litigious business environment there is inevitably a degree of “every man for himself” or “every woman for herself”. There is also a danger that directors take steps that they believe are for the benefit of the company but ultimately lead to personal liability. A classic example is the board of directors who continue to incur liabilities when a company is insolvent in the hope that the company can trade its way out of the problem. If it does trade its way out of insolvency then this will not be an excuse to a claim by the liquidator for wrongful trading.
By Ed Weeks, April 24, 2009 @ 6:32 pm
In my previous comment I omitted the crucial word “not” in the final sentence. If the company does not trade its way out of an insolvent position then the directors are vulnerable to a claim for wrongful trading.
By Saffron, July 1, 2009 @ 1:40 pm
*walks up to Mr Weeks, sticks tongue out, blows massive raspberry, wiggles behind and leaves* huh
By Ed Weeks, July 15, 2009 @ 6:07 pm
Well that told me!
Ed