Regulation Update: Directors taking early advice has never been more important

As a result of new regulations which came into force on 1^st October 2015 directors may find their actions scrutinised more closely if they are involved in a company which enters liquidation or administration during their stewardship.

When a company goes into liquidation or administration the Insolvency Practitioner (IP)has a statutory duty to investigate the conduct of the directors in the period leading up to the insolvency appointment. In the past IPs have often been unable to commence proceedings against Directors due to a lack of funds available in the estate. In circumstances where there are no funds available the IP would have been facing potential costs if they commenced litigation in their own name so more often than not the lack of funds meant that actions were not pursued.

Now new regulations allow IPs to assign any causes of actions in their own name to litigation funders. Litigation funding has grown significantly over the last few years in the area of bringing and continuing litigation against Directors and third parties guilty of offences under the Companies Act. Now they have a readymade new market in taking assignments of IP actions for wrongful trading, preferences and transactions at an undervalue. Because of their financially strong balance sheets litigation funding companies can litigate from a position of strength and directors find themselves facing a well funded team of lawyers when seeking to defend themselves. These companies specialise in litigation so any assignment to them will inevitably lead to directors having to seek their own legal advice to defend their actions.

Taking advice early when a company begins to display signs of distress has never been more important. We can talk Directors through the dangers of not being proactive in formulating a rescue plan and crucially failing to minute the strategy. Our aim is to ensure that directors do not find themselves in a position of having to defend themselves at all as all of their actions have been taken either in accordance with advice received or as a result of advice received.

We offer a free initial consultation with directors where we can offer practical advice as to the best way forward. We are also able to offer a more comprehensive financial health check for companies to critically consider their strategies and to suggest alternative lines of funding and approach which may assist them. The growth of litigation against directors for their actions in the run up to an insolvency should focus directors’ minds as to the consequences of not seeking early advice.

Should you wish to discuss the change in regulations, please contact us on 020 7186 1144.

Author
Nick O'Reilley
Tel: +44 (0) 20 7186 114
Email: noreilly@moorfieldscr.com

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