Although the directors of a Limited company are not normally held liable for the debts of the company, frequently the courts on behalf of the creditors can deem one or more of the directors liable for the company's debts during a formal insolvency procedure. Once a company has become insolvent because its debts and creditors are greater than its assets the directors of the company have a statutory duty in their capacity as directors to act in the best interests of the company's creditors as a whole. The directors must be able to demonstate that they have done everything possible under their control to ensure the repayments of all creditors using the company's resources.
The directors cannot deliberately take any actions that would cause the company's debts to increase or go unpaid. the directors should not show any favourtism towards particular suppliers or creditors. If a director fails to meet his or her fundamental duties of acting in the interest of all the company's creditors whilst trading insolvently, they are likely to face severe personal liabilities and disqualification from acting as a director of a limited company in the future.
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Directors also have a responsibility to ensure that their managers, shareholders, employees or anyone else that actively participates in the control of the company do not perform any actions that would be to the detriment of the company's creditors. Directors must upon becoming aware of their company's insolvent circumstances seek the advice of a licensed insolvency practitioner at the earliest opportunity in order that they avoid mistakes and future personal liabilities.
Director's personal liabilities for company debts can be proved if it can be shown that they performed and inappropriate actions:
Continuing to pay shareholders dividends whilst the company is insolvent
Using fraudulent methods to raise the funds needed to repay creditors (i.e. – obtaining financing using misleading or inaccurate information, or collecting payment for goods or services that could not be rendered)
Withdrawing and/or using company funds for non-business activity; this is an offence known as misfeasance
Entering into a personal guarantee and then breaching its' terms
Disposing of the company's assets at undervalue or no value
During the insolvency procedure liquidators, administrators and receivers are required to conduct a thorough investigation of company's affairs and directors conduct to ensure their has been no wrongful trading or misfeasance .
If a director has acted in an inapproriate manner he or she will receive a adverse report which sent to the department of business, innovation and skills who will conduct further investigations and have the powers to disqualify directors for periods up to 15 years. Directors who are found to have owe the company money will be required to repay that money back to the company.
If you’re unsure about your duties as a director and are concerned that you may be at risk of wrongful trading accusations, contact us today to find out how we can help.
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