Directors' personal liability for company debts
Are company directors liable for debts of a company?
In certain cases, a company director can be held personally responsible for certain debts of a limited company which is encountering financial difficulties or insolvency. A court can require directors to contribute to debts if they shouldn’t have allowed a business to continue trading (wrongful trading). Any fraudulent trading or misfeasance can also result in directors becoming personally liable for a company’s debts, as can issues involving pensions or personal guarantees.
What is wrongful trading?
Company directors have an ongoing duty to protect any creditors. This means that if they allow their company to continue trading despite financial problems which look like they will lead to insolvent liquidation, they will be deemed to have contributed to the eventual losses and could be held personally liable to make good debts to creditors.
If a director is aware (or should be aware) of financial difficulties, they need to step in and try to take action. Resigning at this point will not be enough to avoid potential future liability; they need to have taken steps to protect the interests of the company and its creditors. Board minutes which record attempts by a director to rectify problems or minimise losses will prove valuable.
What is the Phoenix Syndrome?
The Phoenix Syndrome refers to the situation where a company director of an insolvent company becomes involved in the running of a new company with a similar name. Sometimes businesses attempt to continue to trade by forming new companies where a previous company has gone into liquidation. A director in this position can be held liable for any debts of the new company.
What is misfeasance?
Misfeasance occurs if a director has breached any of their fiduciary duties. Examples include allowing preferences (any transaction which puts a creditor of an insolvent company at an advantage which they would not have enjoyed as a result of the liquidation process) or transactions at undervalue (any transaction which appears to contain a significant imbalance).
When else can a company director become liable for debts?
If there was any attempt to defraud creditors or other types of fraudulent trading, directors can be held personally liable for debts. Furthermore, they need to be careful about pension deficits or any personal guarantees they have given in their role as a director.