Directors’ Liabilities – Where A Director Is Personally Liable For A Company’s Debts
A director can be held personally liable for some elements of a company’s debts, in the event it becomes insolvent. This puts your personal position at risk, and without the right action could lead to bankruptcy proceedings.
To avoid directors’ liabilities, it is important to seek legal advice as soon as your company faces the threat of insolvency. We can guide you through the process, ensuring you comply with your legal duties.
If you have already been accused of breaching your responsibilities as a director, we can defend any claims brought by creditors, working to protect your personal position.
Director Liability For Insolvent Companies
As a director, you are under a fiduciary duty to act in the best interests of your company and its shareholders. Once your company is deemed insolvent, you are under a legal duty to protect the interests of your creditors. If you breach your legal duties, there are a number of possible consequences – one of which is that you become personally liable for the company’s debts.
There are different scenarios which may lead to a director becoming liable for the company’s debts. Some of the most common include:
- Fraudulent trading
- Transactions at under value
- Unfair preference
- Wrongful trading
- Personal guarantee
- Outstanding HMRC payments
If an insolvent company continues to trade with the intention of defrauding creditors, or for any other fraudulent purpose, it will amount to ‘fraudulent trading’. Anyone who was party to the fraudulent trading can be ordered to contribute towards the company’s assets, which are then used to repay creditors.
Fraudulent trading may also result in criminal proceedings, along with a director disqualification order.
For a claim of fraudulent trading to be upheld, there must have been ‘actual dishonesty’. This is what separates fraudulent trading from wrongful trading.
Find out more about fraudulent trading.
Misfeasance is when a director fails to meet their legal fiduciary duties. If this causes loss to a creditor, the court can make a director personally liable for some or all of the company’s debts. If a director is found accountable for any money or assets held by the company, the court can also order the director to repay, restore or account for the money/property with interest.
As a director, you are obliged to know and understand your legal duties. Therefore, if you are accused of misfeasance, you cannot rely on a plea of ignorance.
Find out more about misfeasance where you have breached your fiduciary duties as a director.
Transactions At Under Value
Transactions at under value is an example of misfeasance. It means a company asset has been transferred to a new owner for less than the market value. This amounts to a breach of the director’s fiduciary duties, as the sale of the asset was not performed in the best interests of the company or its creditors.
If a court finds that an asset has not been valued properly, it can set aside the transaction and order the restoration of the asset.
Find out more about transactions at under value.
While one creditor may place more pressure on you to repay a debt than another, it is important that directors treat all creditors equally in an insolvency situation. If a director favours one creditor for reasons that are deemed ‘unfair’, the court can set aside the transaction and order the return/repayment of the asset or money.
This will be particularly problematic if a director has paid off a director’s loan, rather than pay off other creditors. When this happens, the court may order the director to repay the loan, which can then be used to settle outstanding debts with other creditors.
Find out more about unfair preference.
If you have signed a personal guarantee and the company becomes insolvent, the creditor is permitted to seek repayment from you, as per the terms of the agreement. Because of the risks involved, it is vital that you get expert legal advice from a solicitor when drawing up a personal guarantee.
Find out more about how a director can be held personally liable for a company’s assets in respect of personal guarantees.
Wrongful trading is when a company continues to trade, even though you should have known that there was no reasonable prospect of avoiding insolvency. Only directors can be deemed liable for wrongful trading, unlike fraudulent trading.
However, a charge of wrongful trading will only be upheld if:
- The company is financially worse off as a result of trading, and
- The director failed to take steps to minimise losses to the company’s creditors
Find out more about wrongful trading.
Outstanding HMRC Payments
If a company is insolvent, the director can also be held personally liable for unpaid VAT, National Insurance Contributions and PAYE – but only if these payments were not made due to dishonest behaviour or a lack of skill, diligence and care.
Find out more about what to do if you are behind with HMRC payments.
Avoiding Director Liabilities
As the term ‘limited company’ suggests, your personal liability as a director is only limited. There are numerous situations in which you could be asked to repay the company’s debts from your own pocket. If you do not have the funds to cover the costs, you will have no choice but to enter into bankruptcy proceedings.
Therefore, it is vital that you do everything in your power to avoid potential liabilities. This means seeking expert legal advice as soon as your company faces threats of insolvency. You should also ensure that you:
- Have kept accurate and up to date books and records, including minutes of company meetings to document the decisions of the board and individual directors.
- Have established the reasons for the financial difficulties of the business and considered future prospects for the company.
- Do not continue to trade or incur additional liabilities when the company is insolvent.
- Do not take deposits for orders which you know are unable to fulfil.
- Do not pay one creditor to the detriment of other creditors.
- Do not incur further credit or issue cheques when you know there is no prospect that they will be honoured.
- Obtain an independent valuation for any assets sold by the company.
How can Altion Law help?
There is a right way and a wrong way to handle an insolvency situation. If you fail to take the correct course of action, there is a risk that you (as the director) will become personally liable for the company’s debts.
Our solicitors can help you navigate an insolvency situation, ensuring you meet your responsibilities. With our guidance, you can rest assured that you will avoid any unwelcome consequences, such as personal liabilities, director disqualification or bankruptcy.
If a claim has already been made against you, we can help you defend the charges, using our legal expertise to achieve the best possible outcome. This claim may be made by a creditor, administrator, liquidator or other party. Whatever the circumstances, we understand how frightening it is to have your personal assets under threat. We can determine the best approach in your case, working to protect you and your family.
Make a Free Enquiry
If you have been accused of failing to meet your legal or fiduciary duties as a director, please contact us at Altion Law.