It is well known that directors must act to promote the success of a company and the benefit of its shareholders.
However, there is less awareness of the fact that if a company is, or is at risk of insolvency, that duty is qualified so that directors must consider and act in the interests of creditors.
Ignoring that obligation can have very serious consequences, some examples include:
Wrongful trading
Where a director knew or ought to have concluded prior to insolvency that there was no reasonable prospect the company could avoid insolvency, any liquidator or administrator appointed can seek a court order requiring the director to make a contribution to the company's assets.
Fraudulent trading
If it appears to a liquidator or an administrator that a business has been carried on with the intent to defraud creditors or for any other fraudulent purpose a court order can be sought that anyone who was knowingly party to that practice be required to make a contribution to the company's assets.
Company Directors Disqualification Act 1986
Any person found liable to make a contribution in respect of either wrongful or fraudulent trading can also be disqualified as a director.
Misfeasance or breach of fudiciary duty
If during the course of a liquidation it transpires that a director has misapplied, retained or otherwise become accountable for any money or property of the company or has otherwise been guilty of any misfeasance or breach of the appropriate duty a court order can be made requiring the director to repay or otherwise account for the money or property with interest.
There are also a variety of specific offences of fraud and deception such as misconduct in the course of winding up, omissions from statement relating to the company's affairs and false representations to creditors.
Clearly, continuing to trade a company which is insolvent or at substantial risk of insolvency is a minefield for directors.
If you are a director or otherwise involved in the management of a company and are concerned to ensure you are minimising any risks that may arise or have concluded that your company is insolvent and cannot continue, then contact one of our experts for an initial discussion.
