When can directors be personally liable?

Blog Insolvency

We are all guilty at times of thinking “what about me?” It’s human nature.

As a director of a struggling company there is often an element of guilt (depending on your morals!) at the increasing debts owing to creditors. As a director it really is vital that consideration is given to the situation as a whole. Sometimes the guilt of how your situation is or may affect other people (trade creditors, employees etc.) can lead to “If I can just get through this bad patch…” What if you can’t though, what if the company was and has been insolvent for some time? You’ve done your best right?

Fraudulent trading under section 213 of the Insolvency Act 1986 would require an element of dishonesty on the part of the director. As a result, fraudulent trading should only really be a concern if a director has genuinely been dishonest and acted with intent.

Wrongful trading under section 214 of the Insolvency Act 1986 on the other hand casts a far wider net. The criteria here is simply “that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”. Once it became clear to the director that there was no longer a reasonable prospect that the company would avoid going into insolvent liquidation or administration, that person must have taken every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken. The bench mark is that of a “reasonably diligent person”.

On the application of a liquidator the court may declare that that person is to be liable to make such contribution to the company’s assets as the court thinks proper.

Wrongful trading claims have historically been pretty rare, but two recent changes were implemented in October 2015 by the Small Business, Enterprise and Employment Act 2015. Not sweeping changes, but an action can now also be made by an administrator under Section 246ZB of the Insolvency Act 1986 (not just limited to a liquidator as was previously the case).

Secondly a liquidator or administrator is now able to assign the right to bring an action against directors under Section 246ZD of the Insolvency Act 1986.

Liquidators may have previously been reluctant to pursue claims by spending creditor money that they deemed risky. Someone else now able to buy the rights to a claim and issue proceedings at their own risk may increase the number of claims that we see. Only time will tell.

Taking advice as soon as you are concerned about the solvency of your company should at the very least substantially reduce the risk of you becoming personally liable.

For a free consultation please contact us on 01932 336149.

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