subject: Insolvency And The Direct Risks For Directors Pushing Beyond The Limit [print this page] The prevailing hostile capital market condition in an atmosphere of economic recession has depressed and almost nullified the performance of many companies. Every day the number of companies going bust due to insolvency is on an increase and it is said that the volume of insolvency is going to peak some where in the near future. With this year coming to a close in a matter of days, the predictions for the coming year are not heartening either. Researches carried out by some leading analysts predict an avalanche of businesses falling into insolvency or going bust in the first-half of the coming year with a marked increase in the percentage compared to the same quarters this year. The figures released by the insolvency service on 6 November shows a 14% increase in company insolvencies for Q3 compared to last year and like I said before, the predicted peaks of insolvency levels in the UK has not yet been reached. How this has to be understood is a question that is awaiting response, because predictions are turning out to be as volatile as the market in reality.
Meanwhile, Companies Act 2006 has come into being with complete force since 1st of October 2009, every company director and manager would be compelled to review the companys constitutional and operational procedures and make changes where ever necessary to comply with the new rules and regulations. More over directors would have to find if they could benefit from the new changes that have been implemented. Directors of companies on the brink of insolvency are at direct and serious risk of facing sentences and huge fines. Directors would be held responsible and would be prosecuted for breach of duty to prevent insolvent trading if they fail to actively monitor the solvency of their company, report and take evasive action because it is their duty to investigate financial conditions and seek appropriate advice and action just as the law suggests. Recently updated business analytics show that there has been a steep increase in the number of directors (of companies living with the fear of being pushed into insolvency) paying incoming money only into banks that threaten legal action, in order to reduce the risk of overdraft and the associated consequences. Most of the directors make personal guarantees for what ever sum of money the company owes the bank. By paying the banks ahead of the other creditors the direct can reduce the burden of personal guarantee that he made to the bank. This preferential treatment of paying the bank first would result in reducing direct legal risks and dangers to the directors as well as help keep the business stay afloat for a while longer, thus helping the director buy more time for a recourse.
But in cases when the director doesnt report his actual insolvent status but goes on trading he would be liable to a lot of charges. Directors pushing their company into insolvency could find themselves facing other related charges including misuse of company assets for self before pushing the company into insolvency, or for undervaluing or even for preferential treatment of creditor.
by: Paul Smythe
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