Insolvency & Corporate Recovery

Insolvency & Corporate Recovery

Claims Against Directors

Generally speaking a director of an insolvent company is not personally liable for the debts of that company. 

However, sometimes a director may have given a personal guarantee or offered security on  his home to encourage a creditor to either lend money to the company or for a supplier to offer the company a credit facility.  In such circumstances and particularly where there appears to be little prospect of a creditor being paid by the company which is insolvent, the creditor will look to the director to honour the guarantee or security offered. 

It is important that before any such guarantee is given, or any security taken, that both parties have the benefit of legal advice because unless the paper work is done correctly, the guarantee or security may not be enforceable. 

Sometimes, prior to a company entering formal insolvency processes, directors may pay certain debts before others.  This may be because the debt that they are paying is one where they have offered a personal guarantee or it may be that they are hoping to start up in business again and want to keep on good terms with a particular supplier. 

Payments of debts in such circumstances may amount to a preference and that may be overturned if the company is subsequently wound up.  Similarly, a director may seek to dispose of assets at an undervalue, sometimes to family members.  If anything has been sold for less than market value then that would normally be viewed as a transaction at an undervalue and could be set aside by a liquidator. 

Directors may also have been advised that it is tax efficient for them to take money out  of the company as a dividend but this can cause problems if the company is in fact insolvent and not in a position to declare dividends. 

In some cases directors carry on trading even when it is obvious that the company is insolvent and trading in such circumstances may amount to wrongful or even fraudulent trading which may result in a director becoming personally liable for company debts.  Any or all of these matters can lead to claims being brought against the directors personally.

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