Can directors be held responsible for company debts?

In the main, the limited company legal structure protects directors from personal liability in relation to business debts. Situations do arise, however, where claims can be made against directors in order to provide protection for creditors against material financial loss.

One such instance is when a company becomes insolvent and has to be liquidated. Directors must ensure they do nothing to compromise creditor returns – in other words, creditor interests must be placed firmly to the fore.  

Personal liability for directors

Being able to demonstrate that creditor losses have been minimised is a key feature running through the issue of personal liability for directors, at least initially. So what will a liquidator look for in this respect during their investigations into director conduct?

Seeking professional insolvency advice

As soon as directors become aware the company may be insolvent, they must seek advice from a licensed insolvency practitioner (IP). Apart from demonstrating responsibility and compliance with the requirements, this offers them the greatest reassurance that any future action is correct, and that creditors won’t incur further losses.

Ceasing trading immediately

The company must cease trading as soon as it becomes insolvent. Increasing the company’s debt situation may result in personal liability for those additional debts.

Protecting creditors’ positions

Directors must ensure other officers of the company, shareholders, and employees, do not take any actions that might diminish returns for creditors as a whole.

When might a director be held liable?

Antecedent transactions

Of particular interest to the liquidator during their investigations are antecedent transactions. These are transactions that have undermined the position of a creditor, or group of creditors.

They include, but are not limited to:

• Preferential payments: when one creditor is paid in favour of others, it creates a ‘preference’ - the recipient may be required to repay the money.
• Transactions at an undervalue: if an asset has been sold for less than its true value, it diminishes returns for creditors and may be reversed by the liquidator.
• Overdrawn director’s loan account: an overdrawn director’s loan account will be considered an asset of the company in liquidation, and subject to immediate repayment by the director.
• Personal guarantees: if personal guarantees have been provided, the lender may enforce the guarantee to recover their money. Failing to repay a personal guarantee will be considered a breach of its terms.
• Unlawful dividend payments: dividend payments are only lawful when there are sufficient distributable profits available to support them, so drawing a dividend when the company is insolvent is likely to lead to a demand for immediate return of the payment(s) in full.

Fraud: providing misleading or non-accurate information on a finance application is just one example of a fraudulent act, and carries with it serious ramifications for directors.

Consequences of being held responsible for company debts

The consequences of being liable for company debt include personal bankruptcy if a director has insufficient funds to repay what is owed. They may be pursued through the courts by the liquidator or other third parties, with the possibility of losing all personal assets.

Directors can also be disqualified from directorship for up to 15 years. A disqualification order may also bar the individual from taking on certain roles, such as trustee of a school or charity. If fraudulent activity is proven, directors face criminal conviction and a possible prison sentence.

Begbies Traynor can provide further advice to directors concerned about personal liability. Contact one of the team to arrange a free same-day meeting – we will explain your position, and assess all available options.