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Is a Company Director liable for it's debts?

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The termination of the temporary measures introduced by the Corporate Insolvency and Governance Act (CIGA 2020) that prevented companies from being wound up by creditors for non-payment of a debt (in certain circumstances) came to an end on 30 September 2021.

We anticipate, and are already seeing evidence of, an increase in winding up orders and scrutiny of the conduct of Company Directors by Liquidators looking to lift the so- called corporate veil and bring proceedings against directors personally.

The following provisions of the Insolvency Act 1986 need to be borne in mind by directors. Even though, they only apply when a company has gone into liquidation they also relate  to the conduct of the directors beforehand.

Section 214 - Wrongful trading

This section provides that a Liquidator of an insolvent company may ask for an order from the courts making a director personally liable to contribute to the company's assets.

The liability will arise where a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation and then failed to take every step with a view to minimising the potential loss to the company's creditors that he ought to have taken.

There are 2 elements to determine liability. One is an objective test which measures the director’s conduct against the level of a reasonable

director in that role whilst the second is a subjective test taking into account the level of skill, knowledge and experience that the director actually has.

This section applies equally to non-executive directors as to executive directors.

The dilemma facing a director of a company which is at significant risk of going into insolvent liquidation:

  • is whether to carry on trading or
  • to put the company into administration or liquidation or
  • to invite the appointment of administrative receivers.

The duty imposed on directors is to minimise the loss to creditors and the steps that should be taken will vary from case to case.

A careful evaluation of the situation must be carried out by the directors, preferably with the aid of professional advisers to determine the best course of action. All decisions taken and the reasons for those decisions should be regularly recorded in board minutes to demonstrate compliance.

Liability for Wrongful Trading applies to any person who is or was a director of a company which subsequently goes into insolvent liquidation and it is not possible to escape liability simply by resigning as the pre-liquidation conduct of all directors will be reviewed.

Section 213 – Fraudulent trading

This section provides that any person who is knowingly party to the carrying on of any business of the company with the intent to defraud creditors (including potential creditors) of the company or creditors of any other person or for any fraudulent purpose will be personally liable to contribute to the company's assets.

In this regard an intent to defraud may be inferred if a person obtains credit when he knows that there is no good reason for thinking that funds will be available to pay the debt.   Liability is usually triggered when a new supplier is taken on just prior to liquidation.

Section 212 – Misfeasance

The Official Receiver, Liquidator, creditor or a shareholder can recover money or damages from officers of the company or those concerned in its management, who have misapplied or retained or become liable or accountable for any money or property of the company, or have been guilty of misfeasance or breach of fiduciary or other duties in relation to the company.

This section covers:

  • the improper payments of dividends,
  • The application of monies for an improper or unauthorised purpose
  • the application of monies contrary to the Companies Acts and
  • the unauthorised loans or payments of unauthorised remuneration to its directors.

Sections 238 – Transactions at an undervalue

A transaction at an undervalue occurs when a company disposes of its assets for significantly less than they are worth.  In those circumstances a Liquidator can apply to have the transaction reversed in the event that the transaction occurred within a period of two years of the company's liquidation.

Section 239 – Preferences

A preference is defined in these circumstances as being a transaction which has the effect of placing a creditor in a better position if the company goes into liquidation than if the transaction had not occurred.

If the transaction occurs within six months before the company's liquidation, the Liquidator can apply to have it set aside must prove that the directors in entering into the transaction were influenced by a desire to produce the preferential effect. 

However, in the case of a transaction with a creditor who is a connected person (which would include the company's shareholders, subsidiaries or directors) the six- month period is extended to two years and there is a presumption that the intention of the transaction was to prefer the creditor leaving the director to prove otherwise.

The most common application of this section occurs in relation to the repayment by the company of loans which are secured by personal guarantees of the directors. Most commonly this occurs when company funds are applied to reduce the Bank overdraft as opposed to paying other creditors.

In order to avoid inadvertently triggering personal liability we recommend that Directors who are concerned as to the Company’s financial position should take immediate professional advice.

If you are looking for more information, please contact John King at john.king@fdrlaw.co.uk or ring John or another member of the team on 01925 230 000 or visit www.fdrlaw.co.uk