DIRECTORS OF companies affected by the recession have been warned to keep a record of all decisions or run the risk of ending up in serious legal trouble and unable to run a company.

“Emotion might mean a director struggles on in the hope he will be able to turn the company around, and trade out of its difficulties,” says John White, vice-president of the Institute of Certified Public Accountants in Ireland.

“But a cool head is required at such times. An emotional response is understandable in a time of crisis – but it’s not appropriate.”

In the event of liquidation, failing to keep proper records can lead to directors facing serious legal charges such as reckless or fraudulent trading, warns White, who runs JBW Consultants in Dungarvan, Co Waterford.

And the court records back his concerns. Recent figures show that, in 20 per cent of cases, company directors were charged over their role in the lead-up to insolvency, meaning they face the prospect of being restricted or disqualified from working as directors.

The Office of the Director of Corporate Enforcement (ODCE) reported last year that 2,100 directors were restricted from being appointed as a director or otherwise being involved in the promotion, formation or management of a company.

Liquidators are obliged to pursue directors unless they can show to the ODCE’s satisfaction that all reasonable steps were taken in the running of a business.

Warning signs that a company is in trouble – shrinking margins, a fall in sales, unpaid bills – are some common alerts, and these are usually first spotted by the company directors, says White.

And if things can’t be saved, action must be taken fast. “Once the company is insolvent, the directors must convene a creditors’ meeting early and put in place the process that will lead to a winding up of operations,” he says.

High Court judge Ms Justice Mary Laffoy was scathing in a recent case involving a construction firm that assured her it was solvent in a case where a creditor was pursuing it for payment only to apply for examinership two days later.

She ruled the company had “deliberately misled” the court.

A company can be brought to court for owing about €1,300 if a debt has been left unpaid for more than 21 days. Although this is unlikely, given the cost of legal proceedings, company directors need to have regular meetings with all involved if there’s trouble looming, says White.

But it’s tough on small and medium business when they have to give up. “I’ve been called in and then had to tell a small business owner he can’t keep going,” says White. “It’s really painful, and they often want to hang on.”

Most company directors want to do the right thing, and there are positive steps they can take, says White. They might be able to cut back on training and labour costs.

They should have regular meetings with creditors and staff, and offer to pay off some debt if the core business is strong – 50 cent for each euro that is owed.

But White urges directors to make sure they have documentary evidence proving they acted in good faith, and did not make foolish decisions or engage in reckless trading. “In many of these enterprises, the business premises is owned by the directors and is rented to the trading company. The directors may have taken money out of the company to repay these property loans. Tax will need to be paid on that money,” says White.

At the first stages of trouble, it’s important to stay calm and call in the experts. And keep a record of all your actions.

If a director decides to try to trade their way out of the company’s problems – a legally permissible choice – but the firm still fails, it is important to show that the decision to stay in business was a sound one. For example, make sure there’s a documented record of a profitable order book and/or saleable assets.

If you’ve done all you can, you won’t end up in trouble, says White.