Personal liability
Personal liability may occur where directors have failed to observe
their statutory responsibilities to the company and its
creditors.
Even if offences have been committed
either knowingly or unknowingly there are often actions that can be
taken to minimise or eliminate the potential personal impact.
This
section covers some of the matters relating to the responsibility of
directors and the implications of insolvency. Reference is made
to directors, however senior members of staff within a business and its
Company Secretary may be considered to be directors.
Is the business insolvent?
Directors
are expected to be aware of the financial position of their business at
all times. Therefore it is expected that directors recognise the
point at which their business is insolvent.
Insolvency is defined as:
- Liabilities of the company are greater than its assets;
- The business is unable to pay its debts as they fall due;
- 3 weeks has passed since a Statutory Demand for over £750 has been served on the company and it has not been paid; or
- A process to recover the debt following a Court Judgement (CCJ) fails to result in full payment – e.g. bailiffs.
The impact of insolvency
Once
a business is insolvent, the directors are expected to act in the best
interests of the creditors ahead of other stakeholders.
At this stage the directors must make a judgment as to what is in the interests of creditors. There are 2 options:
- Place the business into a formal insolvency procedure – this effectively crystallises the loss and prevents it from increasing; or
- Allow
the business to continue to trade – if directors think there is a
realistic prospect of bringing the business back to solvency the
creditor’s position will improve.
At this stage many directors seek professional advice to ensure that any decisions they are making are appropriate. If a director makes the wrong decision then they may incur personal liability for some of the business debts or be required to contribute to any eventual insolvency procedure.