We are often asked by worried directors – Are directors liable for debt in a limited company?
Directors’ personal liability in a solvent company
In a solvent company, the Companies Act 2006 covers most of the duties of directors in a limited company and these are well known, so directors are able to answer the question are directors liable for debt in a limited company fairly easily. While a company is not undergoing any form of voluntary arrangement or company rescue due to insolvency problems, the duties and liabilities of directors are centered around the shareholders of a company, and the liability of directors for debt in their limited company will be limited to the value of their own shareholding.
Directors’ duties in a company requiring company rescue, and/or in an insolvent situation
Where a company is financially distressed and requires a business recovery strategy, and it is clear that formal insolvency proceedings are becoming more likely, the directors duty to act in the interests of the shareholders is replaced by a duty to act in the interests of the creditors of the company needing company rescue, and to preserve the value in the company in business recovery in order to maximise return to creditors, not shareholders.
Once it is clear that there are company insolvency problems, then directors open themselves up to personal liability for debts of the limited company which may need to go into a business recovery process, in several ways.
Offences which can be committed under Insolvency legislation
Insolvency legislation applies personal liability to directors in a number of circumstances where they may have made the position of creditors worse by their actions (or non-actions). For example
- if they continue to trade in a business turnaround with the intention of defrauding creditors; or
- if they knew or ought to have concluded there was no reasonable prospects that the company would have a successful business recovery, but they continued to incur credit, and increase the loss to creditors; or
- where the directors might transfer company assets at an undervalue in a company restructuring, particularly if to a connected person of the business during a business restructuring.
Therefore in answer to the question are directors liable for debt in a limited company, the answer is that if a company is solvent, then it is unlikely, but once a company crosses the line into insolvency, then directors need to be vigilant about their own personal liability potential particularly during a business recovery, especially when business restructuring, or company restructuring, or in other forms of informal company rescue.
Concerned directors should seek the advice of a business rescue expert such as our team at Francis Wilks & Jones, who have a vast range of experience in advising company directors in all aspects of their own personal liability during a company rescue procedure.