Will I be effected as a Director if my company goes Insolvent?

When a company becomes insolvent, its directors face several potential consequences and responsibilities. The exact outcomes depend on the jurisdiction and the specific circumstances of the insolvency. Here’s a general overview of what can happen to directors of an insolvent company:

1. Duties and Responsibilities

• Fiduciary Duties: Directors are obligated to act in the best interests of the company’s creditors rather than its shareholders. They must avoid actions that could worsen the creditors’ position.
• Duty to Minimise Losses: Directors should take steps to minimize losses to creditors. This might include stopping trading, seeking professional advice, or initiating insolvency proceedings.

2. Legal Consequences

• Wrongful Trading: Directors can be held personally liable if they continue to trade when they knew or should have known there was no reasonable prospect of avoiding insolvency.
• Fraudulent Trading: If directors are found to have carried out business with intent to defraud creditors or for any fraudulent purpose, they can face severe penalties, including personal liability and potential criminal charges.
• Misfeasance: Directors can be liable for misfeasance if they breach their fiduciary duties or misuse company assets.

3. Disqualification

• Director Disqualification: Insolvency proceedings may lead to investigations into the directors’ conduct. If found culpable, directors can be disqualified from acting as directors of any company for a specified period.

4. Financial Consequences

• Personal Liability: Directors can be held personally liable for debts if they are found guilty of wrongful or fraudulent trading, or if they have provided personal guarantees for company debts.

5. Reputational Damage

• Professional Reputations: Directors of an insolvent company may suffer reputational damage, affecting their future career opportunities and ability to serve on other boards.

6. Civil and Criminal Penalties

• Civil Penalties: These can include fines and orders to repay money or return property to the company.
• Criminal Penalties: In cases of serious misconduct, directors can face criminal charges, which might lead to fines or imprisonment.

7. Investigation and Reporting

• Insolvency Practitioners: Insolvency practitioners (e.g., administrators or liquidators) are often required to report on the conduct of directors. These reports can trigger further investigations and actions by regulatory bodies.

8. Potential for Relief

• Relief from Liability: In some cases, directors may apply for relief from liability if they can demonstrate they acted honestly and reasonably, and they ought fairly to be excused for the conduct in question.

Summary

The consequences for directors of an insolvent company can be severe and multifaceted. They have a duty to act in the best interest of creditors and can face significant legal, financial, and personal repercussions if found to have breached their duties. Seeking professional legal and financial advice is crucial for directors navigating insolvency.

Keywood Group is a Licensed Insolvency Practice with offices in Birmingham and London. Practitioners Association.  If you want further information, please contact us for a no obligation chat.