Company directors should be aware of their duties to creditors when their company becomes insolvent.
Insolvency occurs when a company is unable to pay its debts when they fall due – or when total liabilities exceeds total asset value.
If you find that your company is insolvent you have an obligation to put the interests of creditors ahead of your own in these circumstances.
The Insolvency Act 1986 states that once a director concludes there is no reasonable prospect of the company continuing to trade, they then have a duty to initiate a formal insolvency process, while taking step’s to minimise creditor losses.
Failure to fulfill that duty may give rise to a number of claims against them.
Sections 171 and 177 Companies Act 2006 impose general duties on directors of a limited company, those duties include:
Section 171: Duty to act within powers
Section 172: Duty to promote the success of the company
Section 173: Duty to exercise independent judgment
Section 174: Duty to exercise reasonable care, skill and diligence
Section 175: Duty to avoid conflicts of interest
Section 176: Duty not to accept benefits from third parties
Section 177: Duty to declare interest in a proposed transaction or arrangement
As a company director, you may apply to have your company struck off the register at Companies House.
However, if a company owes money to creditors, company dissolution is not an option as you must declare that there are no unpaid company creditors when undertaking this process.
In addition, if you choose to repay certain debts in favour of others, you may be accused of giving preferential treatment. Consequently, the court may order the repaid creditor to refund the payment.
Furthermore, if you continue to enter into new contracts and continue to trade with no intention to repay creditors you may be liable for wrongful trading or even fraudulent trading.
Failure to prioritise the interests of a company’s creditors may result in a company director becoming personally liable for the company’s debts by way of a claim for misfeasance by an appointed liquidator or administrator. Thus, it is imperative that directors act correctly to minimise any such risk.
In addition, a company director may become the subject of a director disqualification order if they fail to meet legal responsibilities listed under the Companies Act 2006. Such an order will prohibit you from acting as a company director for up to 15 years following a formal investigation carried out by the Insolvency Service.
Our experts are here to advise you on how to avoid personal liabilities and facilitate the best possible outcome.
Please do not hesitate to call our offices on 0113 266 0735 should you require our assistance.