DIRECTORS of distressed businesses could avoid personal liability for losses to creditors if they get professional advice early on, according to an insolvency practitioner.
Greg Palfrey, who heads the restructuring and recovery services at Smith & Williamson, said businesses should seek help from qualified insolvency experts as soon as it becomes apparent there is a question mark over their financial ability to continue trading.
He made the comments after the issue was highlighted by a High Court case involving Portsmouth building contractor Ralls, which collapsed in 2010 after 119 years due to bad weather and costly contract snags.
It was alleged in the civil case that the directors continued to trade wrongfully and should be liable for subsequent losses incurred by creditors.
That claim was rejected by Mr Justice Snowden at the Royal Courts of Justice.
He stated in his judgment: ‘Standing back, whatever other criticisms can be made of the manner in which the directors conducted the business of the company between August 31, 2010 and October 13, 2010, I think it is entirely plausible that such continued activity did not cause loss to the company overall or worsen the position of the creditors as a whole.’
The directors of Ralls contended that throughout the relevant period, from the end of July 2010, they were ‘taking steps which had a reasonable prospect of rescuing the company and avoiding an insolvent liquidation’.
Although not involved in the case, Mr Palfrey said the Ralls case shows the importance of directors getting professional advisers in as soon as possible.
He said: ‘The risks can be greatly reduced by some appropriate professional advice at an early stage.
‘Advisory cost is usually seen as the deterrent issue to directors on the ropes. For instance, “I do not have the money to pay my suppliers let alone an insolvency professional,” is often said.
‘Some directors bury their heads in the sand.
‘But if that advice might end up safeguarding your home, surely it is money well spent, especially if you will not be criticised for obtaining such advice?
‘In fact, as far as a judge is concerned, it could be crucial should the issue arise in court.’