In the event of a company becoming insolvent due to its debts and creditors exceeding its assets, it is the statutory duty of the company’s directors to act in the best interests of the company’s creditors as a whole. It must be possible for the directors to demonstrate that they have taken every feasible step within their control to ensure that all creditors have been repaid using the company’s resources.
The directors are not permitted to deliberately take any actions that would result in the company’s debts increasing or going unpaid. No favouritism should be shown by the directors towards specific suppliers or creditors. Furthermore, a director who fails in his or her fundamental duties of acting in the interests of all of the creditors of the company while trading insolvent runs the risk of severe personal liabilities and disqualification from serving as a limited company director in the future.
Directors have various important duties if their company is insolvent
It is also the responsibility of directors to ensure that their managers, shareholders, employees and any other people actively involved in the control of the company refrain from actions that would be detrimental to the company’s creditors. As soon as directors become aware of the insolvency of their company, they must seek a licensed insolvency practitioner’s advice at the earliest opportunity, so that mistakes and future personal liabilities can be avoided.
In what circumstances can a director be held liable for company debts?
A director can be held personally liable for company debts if it can be shown that they took inappropriate actions. Examples of such actions include continuing to pay shareholders’ dividends during the company’s insolvency, and the use of fraudulent methods to raise the funds required to repay creditors. A director can be guilty of the latter if he or she uses misleading or inaccurate information to obtain financing, or collects payment for goods or services that were not delivered.
You may also be held liable for company debts as a director if you withdraw and/or use company funds for non-business activity – an offence known as misfeasance – or enter into a personal guarantee with terms that you then breach. Disposing of the company’s assets below their true value, or overpaying yourself from your company – creating a large overdrawn directors’ loan account – are similarly problematic. In the case of the latter, such money will be repayable during the insolvency process, given that it is deemed to be the company’s asset.
Director wrongdoing can have severe consequences
During the insolvency procedure, liquidators, administrators and receivers are required to thoroughly investigate the affected company’s affairs and the conduct of its directors, to ensure that no wrongful trading or misfeasance has taken place.
In the event of it being shown that a director has indeed acted inappropriately, an adverse report will be compiled in relation to their behaviour and sent to the Department for Business, Energy & Industrial Strategy, which will then undertake its own investigations and has the powers to impose a disqualification period on the director of up to 15 years.
If a director is found to have an overdrawn directors’ loan – meaning that they owe money to the company – the repayment of that money back to the company is required. Similarly payment may be demanded on shares which have not been fully paid up.
With our expertise in company governance here at London Registrars, we are well-placed to assist you if you are unsure what your duties are as a director, and concerned about the risk of being accused of wrongful trading. Call our professional, experienced and informed team now on 020 7608 0011 now.