DESPITE protestations by company directors to the contrary, in the vast majority of cases the full weight of responsibility for company failure rests fairly and squarely on their shoulders.
Whilst directors try to lay the blame on a variety of sudden, unforeseen and unavoidable circumstances lying beyond their control, this is not a view shared by professionals.
Surveys by R3 (Association of Business Recovery Professionals) in recen
t years show insolvency practitioners list the predominant factor in most company insolvencies as poor management.
Yet, in spite of this, currently anyone can become a company director and obtain the limited liability status of operating via a company without any requirement to demonstrate knowledge of, or competence in, the myriad of administrative and legislative issues with which they must comply.
Whilst directors might contend that they can hire such advice from professional advisers, such professionals can only provide advice on those areas when they are requested to do so. Where a company director is oblivious to the existence of an emerging problem, he is unlikely to call upon a professional adviser.
The only restrictions presently prohibiting anyone from becoming a director are that the person must not have been disqualified by a court from acting as a company director, be an undischarged bankrupt, be under the age of 16 (in Scotland) and - for a plc or its subsidiaries - be over the age of 70. Given the responsibility that company directors have to shareholders and creditors for any monies due, such scant restrictions seem woefully inadequate.
Wrongful trading may be difficult to prove, but there are many instances of companies that have effectively been insolvent for some time but have continued under the false notion that they will somehow be able to trade their way out of the hard times.
Contrary to common perception, poor management is not a phenomenon confined to small companies. In fact, if anything, poor management is a greater problem for companies with £5 million plus turnover.
Small businesses are predominantly headed by entrepreneurs who have built upon a successful business idea but, as the business has grown, they are not necessarily in possession of the requisite financial or management skills to run a company with maximum proficiency - and when a company fails, whilst it is often the management that is at fault, it is the creditors who pay the price. Regardless of what steps the Government takes to tinker with corporate or insolvency legislation, such changes would appear unlikely to be able to effectively raise the standard of poor management performance and this is the problem that must be addressed.
The Government places a burden on businesses to collect taxes on its behalf, yet many entrepreneurs have no prior knowledge of PAYE/NIC or matters relating to VAT. Consequently, the problem of poor management performance might be better addressed through the introduction of some form of statutory qualification for directors of limited companies, perhaps along similar lines to that of the Continuous Personal Development training programmes that many professional advisers are required to undertake on an annual basis to ensure that they keep abreast of the latest developments within their particular fields of expertise.
Such a form of qualification aimed at company directors and measuring knowledge of such issues as directors’ responsibilities, basic accounts preparation, cash forecasting, tax law, employment law and Companies Act legislation should help reduce the number of companies that fail as a consequence of poor management.
Whilst the introduction of such a qualification system might cause some administrative headaches, these are unlikely to be insurmountable and a workable solution could soon be established.
Derek Simpson is an Insolvency Practitioner at French Duncan Chartered Accountants
