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Company insolvency and directors' liability

A director of a company that is wound up because it is insolvent can be made personally liable for any of its debts as the court sees fit, if there has been ‘wrongful trading’.

  • Wrongful trading = when directors of a company continue to trade when they should have realised that there was no reasonable prospect of the company avoiding insolvent liquidation and the company then goes into liquidation.

  • The law exists to ensure that irresponsible directors bear the losses when a company goes into insolvent liquidation, not innocent creditors.

  • A case for wrongful trading is brought by the liquidator of the company who makes the application to court. On the application by the liquidator, the court can declare that the director is liable to make a contribution to the company’s assets in an amount the court thinks proper - i.e. directors who trade wrongfully lose the protection of limited liability.

  • But a Court will not make an order for wrongful trading if the directors can be said to have taken every step with a view to minimising the potential loss to the company's creditors.

  • Just because a company's debts are greater than its assets, it does not mean the company will necessarily go into insolvent liquidation. Liability for wrongful trading will only arise if it can be shown that the company was worse off as a result of the continuation of trading.

  • What specific action should directors take? – Seek legal and accountancy advice as soon as it's clear that the company has serious problems. The simple step of seeking advice helps to show that directors have acted reasonably.

  • What if a director disagrees with other directors' decisions and the board is split? – Ensure all views are heard and are accurately minuted.

  • Can directors simply resign to avoid liability? – No, ex-directors can still be found liable for wrongful trading.

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