Q. I am a director of a company in financial difficulties and am concerned that I could become personally liable if the company fails. Can this happen?
A. A director of a company in financial difficulties can face personal liability in respect of:
- Personal guarantees (PGs).
- Fraudulent trading.
- Wrongful trading.
- Misfeasance or breach of fiduciary duty.
- Various fraud and misconduct related offences.
Most of these issues arise in the context of a company liquidation and a liquidator has powers to apply to the court to request that a director makes a contribution to the company's assets where, for example, it appears that any business of the company has been carried on with the intent to defraud creditors (fraudulent trading) or where and at some point before the commencement of the winding up of the company, a Director knew there was no reasonable prospect that the company would avoid going into such insolvent liquidation yet continued to trade (Wrongful Trading).
Directors in your position therefore face therefore a number of serious issues. What can they do to keep the company in business without running the risk of committing an offence or incurring a personal liability? At what stage must they decide to cease trading? If they do decide to cease trading, which insolvency route should the company follow? Given the complexity of the above issues, as soon as the directors are aware that the company is in financial difficulties it is imperative that they seek external financial and legal advice.
