At a time when businesses in all sectors are facing a wide range of financial pressures, it’s important to be aware of directors’ liabilities for failing to pay company debts.
In the current economic landscape, many businesses are continuing to face financial problems, following factors including Brexit and the pandemic. The result has been that many company directors have entered into written agreements to repay debts over a period of time, however, with many companies unable to meet their obligations as agreed, they may be in breach of the Statute of Frauds (Amendment) Act 1828.
In the event that a company is unable to make payments to creditors as required, this can result in personal liability for directors, but what does this mean? When is a company director liable for company debts?
Should a company director be found to have signed a written agreement to pay business debts in the knowledge that it is unlikely that the company can be rescued in order to generate revenue to make these payments, this is a fraudulent violation of the Statute of Frauds (Amendment) Act 1828. Should the director be found guilty under this law, the claimant of debts owed is entitled to take action to recover what is owed, and the director is personally liable for the act of fraud, in spite of the company insolvency.
Director’s liability for wrongful or fraudulent trading
If a company is experiencing financial difficulties, it’s important to be aware of the actions that could leave directors’ liable for wrongful or fraudulent trading.
Should a company trade whilst insolvent and the change of recovery is bleak, directors can be found liable for wrongful trading and/or misfeasance. The director’s key responsibility should be to focus on mitigating losses and refrain from initiating further trades or showing partiality towards certain creditors over others.
If a director portrays their company as capable of making payments in order to enter new payment agreements, then there is also a risk of fraudulent trading, which is a much more severe issue than wrongful trading, so a director could face a greater amount of personal responsibility for the actions of their company.
Regardless of whether directors intended to continue trading fraudulently in an attempt to rescue the company and pay creditors, if it is their intention to deceive, then this act is deemed to be fraudulent. Even a single transaction can be considered fraudulent trading.
Guidance to avoid liability for company debts
For company directors experiencing financial difficulties and concerned about their ability to pay debts as they are owed, it’s important to seek professional advice from a licensed insolvency practitioner as early as possible.
As well as advising on the options available for the business, insolvency practitioners will also provide advice on preventing directors’ liability for company debts by ensuring that they do not trade wrongfully or fraudulently when there is no chance of the recovery of a business.
To arrange a free initial consultation to discuss the challenges facing your business, contact BEACON LIP.
