October 2008: Most common mistakes of directors in a recession


Business Law Update
from Cousins Business Law

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October 2008

Gary CousinsWelcome to the October issue of Business Law Update from Cousins Business Law. This month we’ve given over almost the whole ezine to some essential advice for Directors as the economy gets tougher.

I hope you will find information relevant to your business in this month’s issue. We are keen to cover topics of concern to business people so if you have questions or topics you would like us to cover, email your ideas to marketing@business-lawfirm.co.uk.


Gary Cousins
0121 778 3212

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Seven Most Common Mistakes Directors Make in a Recession

As the credit crunch deepens into what looks like an unavoidable recession, directors are asking us what they can do to protect themselves personally should their business be affected.

The events since the Lehman Brothers’ collapse have been frightening for most, if not all, SMEs and family-owned businesses. During the first few weeks of October, it seemed as if money had completely frozen, with few businesses making any payments at all. Thankfully, this seems to have relaxed somewhat and money is flowing again but most businesses are predicting a downturn in trade as confidence across the economy falls.

Whilst no amount of legal or business advice can guarantee survival in these troubled times, it is worth knowing the most common mistakes that directors make so you can ensure that you avoid them to help protect your business and your personal assets as much as possible.

Mistake 1 – Not Having a Good Management Accounting System

Most businesses fail due to cash-flow problems rather than anything else. It is easy for directors in SME and family-owned businesses to concentrate on what they do best, which is often getting the orders in and making sure they are fulfilled efficiently. As the recession bites harder, directors will inevitably have to concentrate more on sales but this will be a waste of time unless a close eye is being kept on the finances too.

These days, with the many computerised accounting systems available, there really is no excuse for not having a good management accounting system. However, we still see clients who do not have adequate systems or who fail to input data correctly or frequently enough. The best thing to do here if you’re not sure is to get advice from an accountant.

Mistake 2 – Not Monitoring Cash-Flow Closely Enough

The days of easy credit have gone; if you reach your overdraft limit and then go to the bank seeking an extension, the chances are that they will say “no”. It has never been more important to stay within agreed overdraft limits and to keep on top of credit control. See the Cousins Business Law article Avoiding Bad Debts during the Credit Crunch – the Zero Tolerance Approach.

Mistake 3 – Spending Too Much Time Working in the Business and Not Enough Working on the Business

It is important to spend time regularly in taking a step back and planning ahead.

Business plans should not just be seen as a chore that has to be done before approaching lenders. They should be seen as a vital road map of where the business is going, how, and what detours it should make to avoid problems ahead. They should be updated frequently, especially in these turbulent times.

You should try to look ahead and predict what areas of your business are likely to grow and what areas shrink. You should also look at your resources and whether cutbacks and redundancies will be inevitable. The sooner these difficult decisions are made, the better.

Is there some area of your business that is making a loss whereas others are making a profit? If so, it might be time to move away from these loss-making areas.

You will also need to look at managing your risk as far as credit control is concerned. If you can’t renegotiate terms with important customers, you need to consider whether the risk of continuing to offer them credit (how would you cope if they suddenly went bust?) would be just too much for your business.

Mistake 4 – Putting Personal Money into a Failing Company

You need to be realistic about whether your company is going through some short-term financial problems or whether it could be failing. Whilst injecting funds into a basically healthy company can help overcome some short-term cash-flow issues, it is not a good idea to use such funds to shore up a failing company.

If you do inject funds into the business, as either capital or a loan, you are likely to lose these if the company does become insolvent (see Mistake 5).

Mistake 5 – Paying Off Some Creditors in Preference to Others

When a company gets into cash-flow problems, a mistake we often see is a director making a short-term loan to the company and then repaying it a month or two later. If you do this and the company later goes into some form of insolvency, then the court could order you to pay back those funds into the company.

The law says that, once a company is technically insolvent, it is often unlawful to pay one creditor in preference to another. Dangers can particularly arise when a director pays back a loan he made or pays off the bank, perhaps in trying to avoid losing money under a personal guarantee.

For more information on this, see our article, Directors’ Responsibilities in Times of Financial Trouble.

Mistake 6 – Transferring Assets or Contracts to a ‘Phoenix Company’

Sometimes insolvency seems inevitable. Maybe you’ve got a good business but a large customer has just gone into liquidation owing you too much money for you to survive.

In such circumstances, it might be advisable to invoke some form of insolvency procedure and perhaps start trading through a new company. The mistake that many directors make, however, is in not taking advice early enough about how to do this while minimising their personal risk.

Transferring assets or contracts to the new company, for example, can result in having to pay back money to the old company, unless they were bought by the new company at a fair market price.

There are also various procedures to achieve the result you want and the sooner you take advice the better.

Mistake 7 – Not Keeping an Eye on Fellow Directors

We see this again and again: the sales or production director is busy getting on with their work and leaving the financial side of the business to the financial director. Maybe they don’t really understand company finances or maybe they’re just too busy to keep a close eye on them?

The problem here is that all directors are held responsible if a company fails and it is no defence to say that you left financial matters for the FD to sort out. Their mistakes could cost you dearly.

If you don’t like the way your fellow directors are running the business, you should say so and insist on it being minuted. There are advisable procedures to follow to safeguard you as much as possible, so early legal advice can be vital.

For advice on your responsibilities as a director or your concerns about the legal responsibilities of your company in tough financial conditions, contact Gary Cousins of Cousins Business Law on 0845 003 5639 or by email here.

Legal Update

Rules changed on displaying company names

New laws came into effect at the start of this month (October 2008), requiring businesses to display their business’s registered name and details clearly.

The Companies (Trading Disclosure) Regulations 2008 mean that companies must display their registered name at their registered office and any other place where it carries on business. The requirement includes the need to display a company’s registered name, registration number and registered office address on all business letters, emails, websites and other documentation including invoices.

Guidance on this and other aspects of the Companies Act 2006 which came into effect on 1st October 2008 is available on the Companies House website.

Plain English Legal Advice

Developers: Time to prepare for new code of conduct

The OFT recently concluded its investigation into the homebuilding industry and in its report announced that a new code of conduct was to be introduced. The code will come into effect in March 2010 and whilst that may seem a long way away at the moment, all developers should be taking steps now to ensure that they have appropriate systems in place to be able to comply with the code.

The OFT has made a number of suggestions as to what might be included in the code but these are a few of the more significant ones:

  1. Reservation fees will now be refundable.
  2. Homebuilders will be liable for any loss suffered by a homebuyer as a result of statements made by either their own sales teams or estate agents acting on their behalf to induce a homebuyer to buy a new home.
  3. If defects to new homes are not rectified within a reasonable period following completion, the homebuyer will have a right to claim compensation for “out of pocket expenses, distress, inconvenience and loss of facility”.
  4. If there is an unreasonable delay in completing a new home sold ‘off plan’ then a homebuyer will be entitled to issue the developer with a ‘completion’ notice which will give the homebuyer the right to withdraw from the purchase if the developer doesn’t complete the property within a reasonable time.

It is essential that all developers ensure that their standard documentation (including reservation forms, contracts and any other literature provided to homebuyers) will be compliant well in advance of the code’s introduction. Cousins Business Law is able to offer a review of all such documents – contact Steve Petty here.

Useful Links

Getting to grips with the Companies Act

The Business Link website contains a useful summary of all the changes is legislation which came into effect on the new common commencement date of 1 October. Cousins Business Law covered some of the more significant changes in our May ezine (Getting to Grips with the Companies Act) but there are some subtle changes affecting doorstep traders (including builders, plumbers, carpenters and glaziers) as well as companies offering residential estate agency services.

A full rundown is available on the Business Link website. For advice on the legal implications of these changes on your business contact Cousins Business Law.

Litigation Madness

Shot across the bows on dodgy claims

A District Judge in the Lewes County Court has given a judgment that comes as a clear warning against some forms of litigation madness.

Graham and Christina Spall issued court proceedings against P&O Cruises claiming £3,000 compensation after they alleged their P&O Amazon adventure cruise was ruined.

The Spalls claimed that Mrs Spall fell off a plastic chair and this left her with concussion and broken glasses. They also claimed that soap was not replaced in their cabin, they were served seafood on hot plates, had food poisoning twice and they feared they were going to be killed by a maniac bus driver whilst on an excursion.

However, District Judge John Merrick took a sensible line. He said, "When you are on a boat like this you have to be careful. You need to look after your own safety. If you have an adventure, it can't be sanitised … If you go to another country, things are different. That's part of the holiday … Part of the adventure is that you are in another environment. If you don't like it, you don't go anywhere like that at all or you don't eat the food."

Let’s hope the courts continue to take a robust line with such cases.

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Cousins Business Law is a member of the Law Society & regulated by the Solicitors Regulation Authority. Head Office: Swan House PO Box 11543, Birmingham, B13 0ZL. Tel +44 (0)121 778 3212. Fax: +44(0)121 275 6155