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Can Directors Be Held Liable For Company Debts in a Ltd Company?

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Can Directors Be Held Liable For Company Debts in a Ltd Company?

Although the directors of a limited company are not normally held liable for the debts of the company, occasionally 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 demonstrate 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 favouritism 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 insolvent, 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' Duties

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. 
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Instances in Which a Director Could Be Held Liable For Company Debts

Directors' personal liabilities for company debts can be proved if it can be shown that they performed any 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 delivered)

  • 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

  • Overpaying yourself from your company; creating a large overdrawn directors' loan account. This will be repayable during an insolvency process as the money is deemed an asset of the company.

The Consequences of Failing to Fulfill Directors' Duties

During the insolvency procedure liquidators, administrators and receivers are required to conduct a thorough investigation of the company's affairs and the directors' conduct to ensure there has been no wrongful trading or misfeasance.

If a director has acted in an inappropriate manner, he or she will receive an adverse report which is sent to the Department for Business, Energy & Industrial Strategy who will conduct further investigations and have the powers to disqualify directors for a period up to 15 years.  Directors who are found to have an overdrawn directors' loan - and therefore owe money to their company - 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. 

It is regrettable to see the demise of such a long standing and well-regarded business however due to external factors the closure became inevitable. We are continuing to work with key members of staff to maximise realisations for the benefit of the company’s creditors and ensure that former employees receive their entitlements as soon as possible.
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