Business debt: Can directors be held liable?

By Silke Rathbone, Principal Partner, Labour Excel

Labour Excel specialises in offering a variety of Labour Law and HR Solutions. Silke Rathbone, one of the Principal Partners, has crafted and honed her skillset and assists corporates and individuals along the Labour journey to ensure they understand what is required of them at all levels.
Directorship has many benefits and rewards, but be assured; there will be obstacles along the road!

The apparent stress, time and pressure could be argued by some as being relevant to position and power, but liability is different. Liability makes it personal in a way! As a director of a limited liability company experiencing financial difficulties, you may be afraid that you could be held personally accountable for the company’s debts.

One of the primary motives for forming a limited liability company or limited liability partnership is to minimise liability for business debt.

However, there are situations where directors may be found personally accountable, meaning they themselves are responsible for the debt. Another threat for directors is they may face criminal prosecution if their conduct is deemed fraudulent or dishonest.

The issue of directors’ accountability typically arises when a company faces insolvency. As a result, directors often question if they will be held accountable for any company losses when it approaches insolvency.

Below are some guidelines regarding when a company director may be held personally liable for corporate debts:

1) If you made a personal guarantee/signed surety

2) If, knowing the business is insolvent, you continue to prioritise shareholders over creditors

3) If you disposed of company assets for less than their fair market worth or for free

4) If the company is a personal liability company

The Insolvency Act of 1986 is the primary statute that outlines potential liabilities.

Here are the key sections within that:

• Immoral trading

• Fraudulent trading

• Misfeasance

• Transactions at a discount

• Preferences

• Directors’ liability: personal guarantee

When the business is in financial trouble or the financial pressure starts tearing at the seams, the director must prioritise creditor interests.

To reach a resolution, it is important to be forthright with creditors and shareholders and maintain open communication channels.

Consult with the LE Consult Group if you need legal assistance – we are here to help!

This article originally appeared in the October edition of Public Sector Leaders. Enjoy your complimentary copy: