Directors of companies in financial difficulties face additional issues and directors of insolvent companies may be found liable for fraudulent or wrongful trading. Where a company is facing financial difficulties, directors should seek independent legal advice as soon possible if they are to avoid potential personal liability. Directors can be liable for fraudulent or wrongful trading if the company continues trading when insolvent and the interests of creditors are prejudiced. Notably where a company is insolvent or approaching insolvency, the general duty to promote the success of the company is modified so that a director must instead act in the best interests of the company’s creditors.
Fraudulent trading occurs if, in the course of winding up, it appears that any business of the company has been carried on with intent to defraud creditors or for any other fraudulent purpose. In such cases, the liquidator can seek a court declaration that anyone who was knowingly party to the fraudulent business should contribute to the company’s assets.
Directors of an insolvent company may be found liable for wrongful trading if it is established that, at a time before the company went into insolvent liquidation, the director knew or ought to have concluded that there was reasonable prospect of the company becoming insolvent and they allowed the company to continue incurring liabilities.
The Insolvency Service’s powers have been extended to investigate and disqualify former directors who have dissolved companies to avoid paying their liabilities, including evading repayment of Government backed loans put in place to support businesses during the Covid-19 pandemic. If misconduct is found, former directors may face disqualification for up to 15 years and prosecution in the most serious cases.