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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.

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