Directors of private limited companies are not usually responsible for settling company debts. However, in an insolvency scenario it is possible for personal liability to arise where the actions of a director have caused a company or its creditors to suffer loss and where an administrator or liquidator concludes that it is right for this to be rectified.
As Michael Clinch, commercial dispute resolution lawyer and insolvency expert with Ingram Winter Green explains: ‘The court has the power to make an orders for directors to pay the company or its creditors appropriate compensation; to make a contribution towards company funds; and to return or account for any improperly retained company assets.’
Why legal advice should be sought
Dealing with a personal liability claim can be a source of extreme stress, particularly where you attempt to go it alone. For this reason it may help to instruct a lawyer who can give you much needed advice and support. This is especially true where your finances are precarious and the claim you are facing could feasibly result in the loss of your home or even bankruptcy.
How our solicitors can help
We can assist you by:
- examining the claim that you face and determining whether it is justified;
- encouraging the administrator or liquidator to negotiate an affordable resolution;
- defending court proceedings and advising you whether claims made by insolvency practitioners should be struck out or reduced; and
- ensuring you are appropriately represented at court to maximise your chances of securing a favourable outcome, without exposing you to irreparable financial harm.
When might the risk of personal liability arise?
The risk of personal liability might arise in a range of circumstance, including where you are accused of:
- wrongful or fraudulent trading;
- misfeasance;
- paying or giving preferences; or
- transferring property or assets at an undervalue.
You may also face liability where legal proceedings have been brought to have you disqualified as a director and ordered to pay compensation. Or where a claim is made against you personally for trading under a prohibited name following insolvency without the necessary procedures being put in place.
Wrongful trading
An insolvency practitioner might issue a claim for wrongful trading against a director who has continued to trade a company despite knowing (or where he ought to have known) that there was no reasonable prospect of insolvency being avoided. If the director failed to take steps that ought properly have been taken in order to minimise potential losses to company creditors, the director may be held to be financially responsible.
This may be the case where you failed to put a company in to insolvency or where you declined to act quickly enough in stopping the company from continuing to trade, despite it being clear that it was in severe and almost certainly terminal financial distress.
Where a claim of wrongful trading is made out, you run the risk of a personal contribution being sought and in a sum which is equal to the losses that you have inflicted. However, you may be able to avoid liability where the wrongdoing occurred between 1 March 2020 and 30 September 2020, or between 26 November 2020 and 30 April 2021, given temporary Covid rules which direct judges to assume that during this period directors are not responsible for any worsening in the financial position of a company or of its creditors.
Fraudulent trading
Fraudulent trading may occur where there is evidence to suggest that you have carried on part of a company’s business with the deliberate intention of defrauding creditors or else for some other fraudulent purpose. This may be the case where it can be shown that you were aware that a company was on the brink of collapse, but nonetheless continued to run up debt you knew could never be repaid, or where you were deliberately robbing Peter to pay Paul in order to convince creditors that all was well and that you remained ‘good’ for any monies owed.
Where fraudulent trading can be established, you are exposed to the risk of a personal contribution being sought in such sum as a court thinks fit, which may in some cases be substantial. However, in order for a claim to succeed there must be proof that you have acted dishonestly and it may therefore be possible to mount a defence where there is evidence to show that your conduct in respect of the company’s affairs was at all times entirely honest.
Misfeasance
Misfeasance may occur in two different scenarios. The first is where, in the context of administration or liquidation, you have failed in your duty to have regard to the interests of creditors as soon as the likelihood of insolvency became clear (or indeed to give priority to those interests once insolvency occurred) and consequently losses have been sustained.
The second is where, in the context of liquidation, you have committed a breach of any of the duties by which you are bound as a company director and this has resulted in a loss being suffered, or where there is evidence to suggest that you have retained or misused company property, for example in order to declare and pay an unlawful dividend.
Where misfeasance is proved, the likely consequence is that you will be required to pay the company appropriate compensation or to return (in whole or in part) the money or property you have kept or misapplied. Note, however, that it may be possible to resist a misfeasance claim where you can show that nothing you have done has resulted in a loss occurring. It may also be possible to reduce the amount you are asked to pay where a loss has been sustained, but for which you and someone else are to blame and it is therefore right that liability be apportioned.
Preferences and transactions at an undervalue
A preference may occur where you have authorised steps to be taken which have had the effect of putting a creditor, surety or guarantor of the company’s debts or liabilities in a more favourable position than they would have otherwise been on the company’s collapse and where you intended for this to happen. This might be the case where you have deliberately chosen to repay an unsecured loan that you personally advanced to the company and which would in all probability go unpaid upon the company entering insolvency.
A transaction at an undervalue may occur where you have authorised a deal between the company and a third party for which the company has either not been paid or where the amount it has received is significantly less than the deal was worth. This may be the case where you have gifted company property to a family member free of charge or where company assets have been transferred to an associate for a sum well below their true market value.
For a preference or transaction at an undervalue to give rise to personal liability, it must have been entered at a time where the company was already insolvent or must have otherwise contributed to its eventual collapse. An insolvency practitioner will usually look at arrangements stretching back for two years where they involve a director or a member of their immediate family, and six months in all other cases. It is therefore important for historical records to be examined to determine whether they reveal anything that might help to defeat a claim.
Where personal liability is established, the court may make whatever order it considers fit to restore the company back to the position that it would have been in had the preference or transaction at an undervalue not taken place. This may include requiring you to pay over a sum equivalent to the losses that your actions have resulted in the company sustaining.
Need more detail?
For further information about when personal liability may arise on the part of a director of an insolvent company, and what we might be able to do to help, please contact Michael on 020 7845 7400 or via email at michaelclinch@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.