Leicester Gouwland: Too easy for directors to avoid fallout from failure

There are no qualifications or experience required to be a director, and only one director and one shareholder are needed to form a company. Photo / 123RF

Opinion

• Leicester Gouwland is a director at accountancy and finance specialist William Buck Christmas Gouwland.

Those dealing with limited liability companies have a responsibility to satisfy themselves they are dealing with a solvent business. However, the time and cost of undertaking this due diligence is usually more trouble than it is worth.

When a business fails, it can be due to the lack of business acumen of the directors, managers and owners. Some people just shouldn't be in business and when the operation fails, it is the suppliers and employees who suffer.

Directors of companies trading while insolvent are liable for those unpaid debts. In theory, at least.

Often, the cost and the challenge of providing the required information to prove a case are too much. Commonly, the director has no assets to make good any loss.

Various events may also cause a business to fail. Examples include the introduction of new technology or overseas influences such as commodity price changes.

One effect of limited liability is to assist incompetent business owners and directors to avoid personal liability to those creditors and employees who do not get paid.

The time has come to ensure directors and owners of companies are held more accountable.

To be a director of a company you need to be 18. You must not be an undischarged bankrupt or be otherwise disqualified through previous misbehaviour.

Generally speaking, anyone can form a company. Open a bank account, obtain an IRD number and GST registration, and you are all set.

There are no qualifications or experience required to be a director, and only one director and one shareholder are needed to form a company.

A possible solution would be to require first-timer directors to obtain approval from the Companies Office to be a director. In this scenario, a potential director would need to:

• Complete a basic business training course from an approved organisation;

• Complete a statement disclosing to the public the director's business experience, qualifications, membership details of relevant organisations, any other relevant information;

• Have a set amount of director's insurance;

• Pay a registration fee and bond.

The purpose of the training is to ensure all potential directors are aware of their responsibilities and to provide basic knowledge they can use when in business. Attending such a course may discourage unsuitable, uncommitted people because of the cost and time required.

The disclosure statement provides creditors, employees and customers with information they can use to assess whether they want to engage with that business.

In addition, a register of directors should be maintained by the Companies Office that would include their disclosure statement. Each director should have to lodge an annual return to the Companies Office. This would include updated information such as the disclosure statement, and crucially, any details of past business failures.

Requiring the director to have directors' insurance may provide the only funds that will be available to creditors, as it's possible a director may have no other available assets.

There should be a fee for the initial registration and lodging the ongoing director annual return. The fee would contain a reimbursement cost for processing the registration and annual returns, plus a contribution to a creditors' fund for creditors, employees and customers of companies that have failed and have suffered losses.

The bond ensures payment of annual return fees and acts as a contribution to the creditors' fund in the event of liquidation, receivership or administration.

Overall, the concept is not to be a significant compliance barrier to people wishing to enter into business. Rather it encourages a pause, to ensure directors form a company for fully considered reasons, and are aware of the consequences.