Reynolds Porter Chamberlain LLP, the city law firm, has reported that 1,437 disqualification orders were placed on directors of companies, including the clients of contractor accountants, that had gone into insolvency last year, a 4 % increase on the number imposed in 2009.

Five years ago there were only 1,173 disqualification orders but since then 6,422 directors have found themselves disqualified. A disqualification order forbids a director of an insolvent company becoming a director or creating or promoting a limited company for anything up to 15 years.

Company insolvencies reached a peak in the third quarter of 2009 when the UK was in the middle of the economic downturn.

Jonathan Davies, a partner at RPC, commented on the results saying that a disqualification order can be career threatening for a director as the director is unable to set up or participate in the creation of a new business for such a long time.

Administrators and liquidators look to blame somebody when a company goes insolvent and company directors have felt the brunt. There was a substantial increase in insolvencies during the economic crisis and as a direct result we have witnessed this increase in disqualification orders.

The law firm also pointed out that the government has clamped down on corporate governance issues since the start of the recession and company directors should protect themselves by obtaining Directors & Officers insurance. A lot of small firms and limited company contractors forego this cover and end up paying enormous legal costs if their company is investigated.

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Director’s and Officer’s Insurance is a policy that covers the legal representation and related costs that may be incurred by an officer of a company as a result of things including (but not limited to)

• Employment litigation, the most common cause
• Allegations of Financial Irregularity in a range of subjects
• Assorted legislative breaches such as HSE rules
• Deviating from the company’s Articles of Association
• Such claims can come from a wide variety of sources, such as employees, shareholders, clients, suppliers and assorted regulatory bodies.

So do you, as a freelance contractor, need this cover?

Firstly you are not necessarily protected against such claims simply by virtue of being a Limited Liability Company. These claims are typically addressed to you personally in your capacity as an officer of the company, liable for the company’s good behaviour and adherence to the various laws in question.

Secondly, if you have employees, the chances of such a claim are increased significantly. The vast majority are employment related, in areas such as discrimination or unfair treatment.

Thirdly, if you are a growing company, investors or new, incoming directors may require your company to have this cover in place as a condition of their contributing to the company.

Like all insurances, you have to do a risk assessment to see if it is worthwhile. While you may not be exposed to employee cases, there are still areas in which you can get caught out, especially if you are not in a purely desk-bound role and so more exposed to the whole gamut of HSE-related laws.

Generally speaking, f you are intending to remain a one man company, it probably isn’t that critical to have such cover. But if you intend growing, it may well be.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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