Liability rattles the directors

In good times people pay their debts and credit control takes a back seat. There is a corporate veil between a director’s money and the company’s funds. This means that creditors can sue the company but not the director. This is good and sensible commercial practice unless you are the person who is owed the money and then it becomes a charter for cheats and scoundrels.

In bad times, experienced creditors get in first, make threats and are quick to take court proceedings.

Here are a few sabres for creditors to rattle to worry directors-

1. Deliberately incurring debts with no chance of paying them back is fraud. If debtors believe that you might call the cops, they are more likely to pay.

2. Insolvent trading. This lifts the veil and directors can be held personally responsible.

3. An investigation by the body which regulates companies. This raises the prospect of fines and being barred from acting as a director for not being a fit and proper person to manage a company.

4. De facto director. You may not have been appointed legally as a director but you may be treated as a director if you have acted like one in fact.

5. Shadow director. This targets the Mr Big who is really calling the shots even if he is not legally a director. Some say this is too wide and could be used to trap your bank manager. But who could take any joy out of such an unfortunate consequence?

Does all this sound a bit squalid? Well it is. But do it wrong and you could be accused of blackmail.

If being a creditor is a bit tedious then there are always the options of conducting credit checks, insisting on guarantees or taking your customer’s mother hostage. However, who has time to plan that sort of thing and run a business.

Extract from "The Law is an Ass—make sure it doesn’t bite yours!