What happens to a Director of an Insolvent Company?
When a company becomes insolvent, the directors’ roles and responsibilities change, and they may face legal and financial consequences. Here’s what typically happens to directors of an insolvent company in the UK:
- Fiduciary Duties: Directors owe various fiduciary duties to the company and its creditors. When a company is insolvent, the directors’ primary duty shifts from the shareholders to the creditors. They are legally obligated to act in the best interests of the creditors and to minimize losses.
- Insolvency Practitioner Involvement: Typically, when a company becomes insolvent, an insolvency practitioner (IP) is appointed. The IP’s role is to assess the company’s financial situation, liquidate its assets if necessary, and distribute the proceeds to creditors. The IP may work closely with the directors to gather information and make decisions.
- Investigation: The insolvency practitioner may investigate the conduct of the directors leading up to the insolvency. If any wrongdoing, such as wrongful trading or fraudulent activity, is uncovered, the directors could be held personally liable.
- Wrongful Trading: If the directors continued to trade the company when they knew or should have known that it was insolvent, they may be held liable for “wrongful trading.” In such cases, the directors may be personally responsible for the company’s debts. However, the Insolvency Act 1986 allows directors to rely on their judgment if they took every step to minimize potential losses to creditors.
- Disqualification: If the directors’ conduct is deemed to be unfit or improper, they may face disqualification as directors for a specific period. The Secretary of State can apply for a disqualification order.
- Personal Liability: Directors can be held personally liable for certain company debts, especially if they have given personal guarantees or engaged in fraudulent activities.
- Compensation Orders: If directors are found to have engaged in wrongdoing or mismanagement, they may be required to pay compensation to creditors to cover some of the losses incurred.
- Ongoing Responsibilities: Directors may still have ongoing responsibilities even after insolvency, such as assisting the insolvency practitioner with information and cooperating in the winding-up process.
Insolvency Practitioners
It’s important for directors to seek legal advice and be proactive in dealing with insolvency to avoid potential liabilities. The rules and regulations regarding insolvency can be complex and are subject to change, so consulting with legal and financial professionals is essential to understand your specific situation and obligations.
Keywood Group is a licensed Insolvency Practice and our in house Insolvency Practitioner is regulated by the Insolvency Practitioners Association (IPA). Contact us today for a no obligation confidential consultation by calling us today on 0121 201 0399 or on 0208 912 0399. Alternatively, you may wish to visit our offices based in Birmingham or London.
