30th March 2020

Personal Liability of a Company Director

As a company director one of the benefits of trading in the entity of a limited company is the protection of limited liability. This means that a director is not personally liable to the company’s creditors for company debts, unless, for example, a personal guarantee has been granted. Compared with other trading entities, such as sole-traders or a traditional partnership, the benefit of limited liability comes with the requirement for directors to fulfil specified duties, obligations and responsibilities.

General duties of directors include co-operating with those necessary to run the business, acting in the best interests of the business and exercising reasonable care, skill and diligence. When a company faces any form of insolvency, the actions of directors can be investigated, which can in certain circumstances result in personal liability for directors. So what transactions are open to challenge and on what grounds? The Insolvency Act 1986 provides for a number of courses of action.

Misfeasance
Misfeasance occurs when a director takes money or assets from the company in circumstances where he is not entitled to do so in the run up to the company entering into an insolvency process, such as liquidation. In these circumstances the liquidator can seek repayment of the monies and return of the assets personally from the director. An action for misfeasance can also be raised if there has been any breach of duty by the director.

Fraudulent Trading
Defined in section 213 of the Insolvency Act, fraudulent trading is when, prior to the insolvency event, the directors have acted in a way to intentionally defraud their creditors. If a director is found to have traded fraudulently, they will be personally liable to make repayment or contributions to the assets of the company. This can also be a criminal offence.

Wrongful Trading
Section 214 of the Insolvency Act sets out the offence of wrongful trading. Wrongful trading occurs when directors continue to trade, in circumstances when they knew or ought to have known that the company was insolvent, or there were no realistic prospects of it avoiding insolvency. Insolvency can be determined in several ways, however it is generally established if it can be shown that liabilities exceed assets, or when the company cannot pay its’ liabilities as they fall due.

If a liquidator or administrator considers that a company has been trading wrongfully, they can raise a Court action seeking payment from the director for the losses occasioned by the company. The Court will consider what action a reasonable director should or would have taken in all the circumstances and then consider the knowledge, skill and experience of the specific director. This means that if a director also has a professional role, such as an accountant or solicitor, that individual is likely to be held to a higher standard.

In order to quantify the loss, the Court will usually consider the losses to the company at the date of the knowledge of insolvency and the loss at the date of the cessation of trade.

What can I do to protect against wrongful trading?

• Continually review the financial position of the company and act appropriately to address issues where necessary;
• Consider very carefully any decision to continue to trade when there is any suggestion of a lack of solvency;
• Minute and record the decision to continue to trade including the considerations had, why the decision was made and who assisted with the decision;
• Engage with your creditors to see if you can minimise losses, e.g. payment holidays; and
• Seek professional advice from your accountant, solicitor or an insolvency practitioner.

COVID 19 – suspension of rules
Directors must always be mindful of the legislation applicable to them and of their duties. In light of the COVID 19 pandemic, the UK Government have considered the legislation and how it might apply at the present time. A statement was released that as at 28 March 2020, wrongful trading provision have been suspended, with the suspension being backdated to 01 March 2020. This is to allow companies and directors to continue to trade, obtain finance and make decisions which may have otherwise fallen foul of the wrongful trading provisions. At present, the suspension is intended to last for three months. This will give directors some scope in terms of continuity of trade and obtaining credit, however directors must be aware that the normal duties of directors will still apply and there may be recourse for breaching these duties and obligations.

For information and help on any of the matters raised in this article please speak to a member of the Blackadders Dispute Resolution Team.

  

Stephanie Carr, Partner              Susan Currie, Solicitor
Dispute Resolution                       Dispute Resolution
Blackadders LLP                           Blackadders LLP
@StephanieYCarr                        @DisputeLawSusan

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