Company directors can be held personally liable for the debts of the company in exceptional circumstances.
This would occur if a director carried on business with the intent to defraud but the intent to defraud must be proven. This is known as fraudulent trading.
Reckless trading can also lead to personal liability for directors. Reckless trading is where a director is knowingly a party to the carrying on of any business of the company in a reckless manner.
The most common occurrence of reckless trading is where it can be shown that the directors have permitted the company to incur liabilities without having reasonable grounds to believe that those debts would be paid.
Failure to keep proper books of account is another offence that can lead to personal liability but if the director can show that he took reasonable steps or appointed another competent and reliable person to keep the company accounts he can avoid liability.
Consequences for directors of an insolvent liquidation
Directors can be disqualified or restricted from acting as directors.
A restriction occurs when a liquidator applies for a restriction order seeking to have the director prevented from acting as a director for a period of five years.
A good defence to such an application is for the director to show that he acted honestly and reasonably.
Directors can be disqualified from acting as directors on a number of grounds such as
a) The conviction of an indictable offence or fraud
b) Breach of duty
c) Persistent default in relation to the relevant company law requirements
d) Having a declaration of personal liability made against them.
Other issues re insolvent liquidation
Other matters that directors need to be aware of in the liquidation of a company include
- Post commencement dispositions-payments made out of the company bank account after the appointment of a liquidator are void
- Fraudulent dispositions-if the effect of a disposition of company property is to defraud the company this disposition can be reversed by the High Court on application by the liquidator
- Fraudulent preference-any payment or disposal of a company with a view to giving a creditor a preference over other creditors is a fraudulent preference and is invalid.
Most of the acts referred to here must take place within six to 12 months of the commencement of the liquidation.
If you have a question or concern, please use the contact form below. We respond within 24 hours, guaranteed.