Photo courtesy of Surrey County Council News
It’s not as straightforward as you would think
It is understandable that creditors want to get paid. They’ll suggest all avenues possible within the course of business and law, including suing directors personally, to reclaim funds owed.
Creditors often ask us three questions in their quest for payment:
1) Why haven’t you sued the director?
2) Why is this person allowed to get away with this?
3) Why is this individual not bankrupt?
Our response:
Is it worth it to sue the director?
As liquidators, we are obliged to investigate the reasons for the failure of the company. However, before incurring costs in taking legal action we must consider the following:
1) How strong is our case? Do we have all the evidence we need? What further evidence would we need?
2) Do we have money to pay for the case? If not, will creditors fund the case?
3) Does the proposed defendant have the means to pay the claim (in full or part)?
Litigation can be an expensive exercise. As liquidators, we are appointed to act prudently and not spend good money after bad.
However, we will take legal action where some or all of these conditions are met:
- There is a strong case,
- We have the funding to do so, and
- The proposed defendant has the ability to pay
- A common difficulty is a director’s inability to pay.
- Directors have often invested everything they own into the failed business, and no longer have the means to make payment.
- Other directors have protected their assets through legitimate trusts which would not be available to cover debts even if they were bankrupted.
- Other directors may be renting everything they have. Just because a director lives in an expensive house doesn’t mean he or she owns it.
Our role is sometimes misinterpreted
It can be frustrating for creditors to see directors “getting away” with perceived wrongdoings; however, a liquidator’s role is not to punish. Rather, liquidators maximise returns for creditors.
There is also a misunderstanding that, simply because the company cannot pay its debts, the director must be “trading while insolvent” and, therefore, held accountable for the debts of the company.
Companies fail all the time and, in most cases, not through the fault of the directors. “Trading while insolvent” is not illegal. If a director realises the company is, or is likely to become, insolvent, they must take appropriate steps to ensure the creditor position does not worsen. The director must also look for ways to salvage the business.
If the business cannot be salvaged or sold, then the director should look to liquidate. In doing so, they are meeting their obligations as directors. If they don’t take such action, the director may be deemed to have “traded recklessly” which is an offence. Yet, even if they have committed this offence, that doesn’t mean a liquidator should take legal action if there will clearly be no benefit to creditors in doing so.
Sometimes, if creditors wish (and are prepared to pay for it), a liquidator may sue to bankrupt the director of a company with the hope that a family member puts some money in and a settlement proposal put forward. Yet, prudent creditors are typically unwilling to put good money after bad.
Always seek sound advice
Gerry Rea Partners takes pride in operating independently and offering sound advice to our clients. You can always count on us to deliver a fair perspective and take action to prevent further losses.
If you in a situation where suing a director seems like the next logical step, please contact Simon Dalton at sdalton@gerryrea.co.nz.