Dot.com directors risking heavy penalties

Out-Law News | 10 Jul 2000 | 12:00 am |

Legal and financial advisers have warned that directors of dot.com companies may be taking irresponsible risks if they attempt to continue trading without adequate funding. The advice has been put forward in an attempt to minimise the problems that directors may face if they are found guilty of such actions which are referred to as ‘wrongful trading’.

Wrongful trading can lead to directors being disqualified from taking on any directorships for a period of 15 years, being forced to pay heavy fines and, in some cases, being made to repay losses incurred during the period of wrongful trading.

These measures are intended to ensure that directors act to protect investor and creditor interests. The problem for directors of dot.com companies is that it is extremely difficult to ascertain at what point they should cease trading.

Many dot.com companies, that rely mainly on outside investors, have very few assets and so directors cannot easily predict when they will run out of funding.

The issue has become very relevant given the downward turn in dot.com investment in recent months. This has been illustrated by recent high profile collapses, including those of Toysmart.com and Boo.com.

These events have made investors wary of over-funding internet start-up companies that may produce only minimal returns for shareholders.
These factors combine to highlight the dilemmas that dot.com directors face when their companies lack consistent financial backing.

In commenting on its role in bringing prosecutions for wrongful trading, the Department of Trade and Industry made clear that it would “take action whenever appropriate when a director has not acted in the best interests of the shareholders”.