Company Insolvency can present a risky situation for directors. They have to ensure that they act correctly since if they do not, they may bring personal liability onto themselves.
The whole concept of a limited company is the liability of its members (shareholders) is limited to the unpaid amount of the shares they own. If their shares are fully paid for, there is no further liability on their part.
There is however a very important exception to the above rule. In most privately owned companies, the shareholders and directors are the same people. Whilst provided the shareholders have fully paid for the shares that they own they have no personal liability, they may have liabilities in their capacity as directors in respect of any company debts they have guaranteed personally, such as trade suppliers, bank borrowing or invoice finance agreements. Other than those guarantee liabilities, provided they have acted properly, the directors have no other personal liabilities in respect of the company’s debts.
The position of a shareholder/ director of a limited company is therefore a very privileged one. However, privilege is almost always accompanied by responsibility.
If the directors of a company are aware that it is insolvent and that there is a possibility that it could fail, they have a responsibility to ensure that consequential losses to creditors are minimised. If they fail to do this and the company subsequently enters insolvent liquidation or administration then they may become accountable for the additional losses creditors have incurred as a result of their failure to fulfil this obligation. It is therefore essential that directors take authoritative professional advice whenever they feel that there is a risk of their company failing.
We are able to advise directors on the steps they should be taking to avoid or at least minimise their risks. It is however essential that such advice is taken at the earliest possible time. We can help to shape the future, but we cannot change the past. If therefore, directors have already exposed themselves to the risk of personal liability, we cannot alter the position, although we can advise on the consequences of their actions.