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Company Debt – Is a director personally liable?

Directors' personal liability for company debts

In certain cases, a company director can be held personally responsible for certain debts of a limited company encountering financial difficulties or insolvency. 

Company directors have an ongoing duty to protect any creditors. A court can require directors to contribute to company debts if they shouldn’t have allowed a business to continue trading (wrongful trading), i.e if they allow their company to continue trading despite financial problems which look like they will lead to insolvent liquidation. In such circumstances, they will be deemed to have contributed to the eventual losses and can be made personally liable to pay company debts. Therefore, 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. 

A director can also be personally liable for company debts if they are guilty of either misfeasance or acts of fraudulent trading such as attempts to defraud creditors. Furthermore, they need to be careful about pension deficits or any personal guarantees they have given as a director. Misfeasance is breach of a director's duty of care, for example, allowing preferences or transactions at undervalue, taking a salary the company cannot afford, or hiding assets from the liquidator (see "The risks associated with favouring creditors" above). Fraudulent trading, a criminal offence, is more serious than wrongful trading or misfeasance (which are not offences). Unlike wrongful trading, a director is only guilty of fraudulent trading if they have a proven intent to defraud. However, in both cases, a director can be disqualified by a court from being a director of any company for a long period.

A person can also be held personally liable for any debts of a new company (often referred to as a "phoenix" company) and guilty of a criminal offence where he is a director of that phoenix company it (or is otherwise involved in managing it) and it has a similar name to that of a previous company that he was a director of that went into insolvent liquidation within the previous 5 years. This wrongful use of a "phoenix" company should be distinguished from the legally sanctioned case of a new company using a similar name with the leave of the court. (Leave of the court is required even where the new company takes over the old company's assets at a fair price with the involvement of its liquidator.) 

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