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What lessons all directors should take from the directors of Carillion

30th May 2018

The shockwaves caused by the collapse of Carillion, continue to be felt, not least of which, by the former directors.

Richard Adams and Zafir Kahn, both former finance directors of Carillion have not had a great start to 2018. They have already seen the failure of their business, been examined before MPs in parliament and been heavily criticised publicly for their conduct, and particularly, in Mr Adam’s case, for “dumping” his shareholding as soon as he possibly could, after his departure from the £1.5bn company.

The Financial Reporting Council announced recently that they would be investigating the company’s financial statements from 2014 up to the first six months of 2017. They join other investigations by the FCA, and various parliamentary committees.

Business failures such as Carillion will always lend themselves to public comment, and an almost irresistible urge to find “blame”, and this process is ongoing. It will be interesting to see what the liquidator’s report on the directors’ and former directors’ conduct in the running of the business and their part in the insolvency, in due course.

Whilst failures of this size are uncommon, directors of businesses face financial difficulties every day. Many of which are overcome by the ingenuity and hard work of the directors themselves.

Most directors these days have a wide understanding of their duties during normal trading circumstances but the uncomfortable experiences of the Carillion directors should give all directors, the opportunity to “pause for thought” and make sure they know what their duties are in the case of financial difficulties.

Directors of Companies experiencing financial difficulties can place themselves at risk of committing offences such as wrongful and fraudulent trading and various fraud and misconduct related offences under the Insolvency Act 1986 (Insolvency Act).

In addition to that, they should be careful of misfeasance or breach of fiduciary duty or that their actions can put them in the position of having caused or allowed gratuitous alienations (Transactions at an undervalue in England & Wales) and unfair preferences (Preferences in England & Wales) to occur. Reusing the company name, without proper consent and notice is also problematic.

That said, as long as entrepreneurs continue to start “on the journey” and to grow businesses, businesses will fail. German entrepreneurs have started to meet to discuss these, on what the BBC coyly translated as “Failure Nights”, (the real translation is unprintable), where they get together to present and discuss their failures and learn from others.

The key to being able to learn and continue is to be mindful of duties which won’t lead to reputational, financial or criminal risk.

If you wish to discuss any issues raised in this post, please contact Pamela Muir, Head of Insolvency and Restructuring.

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