Personal liability of directors in the context of insolvency or company distress

Directors need to be mindful of incurring personal liability where companies are distressed. This article provides an overview of some of the key areas where directors could incur personal liability when navigating their business through difficult times and stresses the importance of taking and following professional advice when faced with financial difficulties.

The board of directors when facing the challenges of insolvency, will need to consider how to balance:

• Can or should they trade through?
• Should and when should trading cease?
• What is the best route into insolvency for the benefit of the business and its stakeholders?

Against the above, the law imposes personal liability on directors who do not make the right decisions at the right times – it is imperative the board seeks advice early, documents the advice and decision making through detailed minutes and follows the advice given.

Below is an overview of the areas a director could fall foul of when navigating the stormy waters of trading difficulties and a brief explanation as to who directors may owe a duty towards.

Wrongful trading and personal liability

Wrongful trading is where a company has gone into insolvent liquidation and before winding up the company, the director continued to trade where they knew or should have known that the Company had no reasonable prospect of avoiding the insolvent liquidation or insolvent administration. If the liquidator or administrator suspects wrongful trading, then they can apply to the Court to order that director or the board to contribute to the company’s assets form their personal wealth.

Fraudulent trading

Directors can be liable to contribute towards the creditors pot if, during the winding up of the company, the directors of the company carried on trading with the intent to defraud creditors of the company or creditors of any other persons or for any fraudulent purpose. The liquidator or administrator will need to apply to the Court to get an order and provide evidence demonstrating the directors fraudulent trading. The evidence must show actual dishonesty. Fraudulent trading does not just apply to directors and can apply to a company that is benefiting from the fraud.

Antecedent Transactions

The insolvency legislation contains a number of provisions to protect the principle of fair asset distribution in the event of insolvency, these include giving powers to insolvency practitioners to:

• Challenge transactions at undervalue;
• Examine and set aside preferential transactions;
• Examine both extortionate credit transactions and challenge invalid or defective floating charges, such as debentures; and
• Examining transactions involving past directors and shareholders.
• Remedial powers

An insolvency practitioner has the ability to apply to Court has the authority to order directors and/or former directors to pay and/or restore company assets with interest if it is found that the directors and/or former directors retained assets and/or money that belonged to the company and the only reason they obtained those assets was through misfeasance and/or through a breach of the director’s duties.

The Court can reverse transactions that have been entered into by the directors and impose curtailment upon directors through disqualification ?

To whom do directors owe a duty in insolvency? 

Directors must act in the best interests of the company. However, when companies are facing insolvency or is insolvent, then the board must act in the best interests of the creditors as a whole.

Insolvencies and periods of trading difficulty are stressful, the obligations upon a director and board to fail to adhere to a great deal of obligations (sometimes conflicting) and deal with the day to day running demands are severe. Making the decision at the right time to stop and take advice can be easier said than done when faced with the ongoing to do list, but is essential to comply with the law and avoid personal liability.

For further information on director duties in insolvency please contact our insolvency lawyers.