The recent pandemic has created enormous financial pressure for many businesses, particularly with regards to cashflow. Although the first peak of the infection seems to have passed, the economic impact is expected to continue to be felt by businesses for some time.
With ongoing restrictions on trade, and no clear sign of when life will return to normal, many companies are facing very real concerns about their future viability. Alongside this, there may be concerns about the degree of personal liability that may be felt by the directors in the event of insolvency.
This guide looks at the question of liability and insolvency.
A Director’s Role
In a limited liability company, directors do not absorb any personal liability in the event that the business fails. Nevertheless, they must act in the best interests of the company at all times or else face a charge of breach of duty.
This will normally mean acting in the best interests of the shareholders, and this simplifies any question of breach. When shareholders are made aware of the directors’ decisions or actions, they cannot later hold them for breach of duty.
It’s more complicated when a company is facing insolvency, as the directors must act in the best interests of the creditors. Carrying out the usual contractual duties may not exonerate them from potential claims, and actions approved by shareholders will not alter the assessment.
It’s worth mentioning that it’s not only the actual directors of a company who may be held to account for breach of duty. Those acting as de facto directors or shadow directors (not holding actual director status but informing directors how to act) could also be held to account.
If you accept a deposit for work you know you cannot deliver, or you apply for credit knowing that the business will not be able to meet its obligations, you could be found guilty of Fraudulent Trading. There are both criminal and civil penalties for such acts.
Administrators are obliged to file a report on the directors with the Insolvency Service. They can choose to issue proceedings which can prevent an individual from holding the position of director for between two and 15 years.
In reality, such harsh action is taken very rarely. Only cases of very significant losses, re-offenders and serious misconduct will be followed up with action.
If the future of a company is in doubt, the directors have an obligation to ensure that any potential losses are minimised. If they fail to do this, the court can order them to contribute to the losses made. The extent of their liability will be the additional losses incurred as a result of their action (or inaction).
If there is a prospect of survival, it may be correct to continue trading, but if losses are rising and it’s clear that insolvency is inevitable, the directors are responsible for ceasing trading. A clear audit trail of the decisions made and the reasons are essential to prevent legal action.
Seek Legal Advice
If you are facing any potential action following the insolvency of a business, an experienced lawyer will be able to provide expert help. Don’t delay making an appointment as the sooner you receive advice, the better chances there are of avoiding serious consequences.