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Risks with Company Contracts

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Each year many companies go into liquidation without any assets of value meaning their creditors often receive nothing. It is a source of much frustration to these creditors that the former directors of the failed company are not held liable for the company debts.

There has however been a recent court of appeal case concerning a Director’s personal liability for company debts and it could allow creditors of solvent or insolvent companies to take action against directors in “deceit”

Previously if a creditor wanted to pursue a Director personally he would usually have to wind up the company and then hope the liquidator would investigate whether the director was responsible for fraudulent or wrongful trading. Liquidators rarely consider this and tend to say that the cost of doing so is too high bearing in mind the lack of assets.

The case of Drouzhba v Wiseman and another [2007] EWCA Civ 1201 involves an action by a creditor against a director who had signed a contract on behalf of a company and, in the circumstances, this was found to have been a representation that the company was solvent and therefore able to pay its debts.

In fact the company was not able to pay and the claimant alleged that they had relied on the director’s signature as a representation of solvency and that without it they would not have entered into the contract. Provided the representation is in writing, then it may be sufficient to allow an action to be brought against that director in deceit.

Clearly not all signatures made by directors qualify as such a representation by that director. However, we have occasionally advised clients to ask a named director of any company they contract with for confirmation of that company’s solvency. Provided they get a response in writing, that director may end up liable for the debt should the company be unable to pay itself and in today’s economic climate where large numbers of companies are facing liquidation, it does seem to go some way to getting round the problem.

There are of course various qualifications to this rule and if you have concerns about company contracts or would like advice on any other areas of Business Law, please call Veitch Penny now for a free half hour chat on 01392 278381.
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