fbpx

Potential Penalties For Directors-Exercise your directors’ responsibilities carefully as the penalties for failing to do so can be formidable.

Even in a limited liability company, you could be held personally liable for losses resulting from some acts or omissions.

  • These include illegal acts and acts beyond your powers or undertaken with insufficient skill and care.
  • You could be liable to contribute for company debts incurred through wrongful or fraudulent trading.

Wrongful Trading

You will be guilty of wrongful (or even fraudulent) trading if you allow the business to carry on, and incur debts, when you know there is no reasonable prospect of the company repaying them. If you do, you could be held personally liable for the company’s debts if it subsequently becomes insolvent.

The fact that the company is making losses does not in itself mean that the company is trading wrongfully. But if there is no reasonable prospect of it moving into profit, and there are doubts about whether its assets will cover its liabilities or whether it can pay its debts, the company is probably trading wrongfully.

The value placed on assets may be critical. The values as stated in the balance sheet are on a going-concern basis. The value of any assets will be much lower in a forced sale. This is particularly true with intangible assets, such as goodwill.

Allow for the expenses of winding up the company in calculating your liabilities.

Fraudulent Trading

A director will be liable if he knowingly continues to carry on business with the intention of defrauding creditors, in the knowledge that there was no reasonable prospect of the creditors being paid by the company.

Directors can be jointly and severally liable for the consequences if they act collectively in breach of their responsibilities.

  • Liability could be unlimited, so you could be made bankrupt as a result of decisions of the other directors, even in a limited liability company.
  • If you disagree with the decisions being made, have it noted in the minutes, including your reasons for disagreeing.
  • You could be disqualified from acting as a director for some types of conduct.
  • They include continuing to trade when the company is insolvent, failure to keep proper accounting records, failure to pay tax and failure to co-operate with the official receiver.
  • Disqualification lasts from two to 15 years.
  • Some actions could result in criminal convictions.
  • They include failure to keep proper accounting records, fraudulent trading, health and safety shortcomings and misappropriation of company funds.

Avoiding Danger

Monitor the financial situation of the company continuously, whether or not you are the financial director.

Take steps to minimise losses to creditors if the company is in, or seems likely to face, financial difficulties.

  • Ask an insolvency practitioner to advise the board. Take detailed minutes of the meeting.
  • Make sure that minutes of directors’ meetings are maintained in any event.
  • They could protect you against future legal action, particularly where there have been boardroom disagreements.
  • Keep in mind the requirements of your employment contract and powers granted under the Articles.
  • Whenever possible, avoid giving personal guarantees of the company’s debts.Exercise your directors’ responsibilities carefully as the penalties for failing to do so can be formidable.
  • Even in a limited liability company, you could be held personally liable for losses resulting from some acts or omissions.
  • These include illegal acts and acts beyond your powers or undertaken with insufficient skill and care.
  • You could be liable to contribute for company debts incurred through wrongful or fraudulent trading.

Wrongful Trading

You will be guilty of wrongful (or even fraudulent) trading if you allow the business to carry on, and incur debts, when you know there is no reasonable prospect of the company repaying them. If you do, you could be held personally liable for the company’s debts if it subsequently becomes insolvent.

The fact that the company is making losses does not in itself mean that the company is trading wrongfully. But if there is no reasonable prospect of it moving into profit, and there are doubts about whether its assets will cover its liabilities or whether it can pay its debts, the company is probably trading wrongfully.

The value placed on assets may be critical. The values as stated in the balance sheet are on a going-concern basis. The value of any assets will be much lower in a forced sale. This is particularly true with intangible assets, such as goodwill.

Allow for the expenses of winding up the company in calculating your liabilities.

Fraudulent Trading

A director will be liable if he knowingly continues to carry on business with the intention of defrauding creditors, in the knowledge that there was no reasonable prospect of the creditors being paid by the company.

Directors can be jointly and severally liable for the consequences if they act collectively in breach of their responsibilities.

  • Liability could be unlimited, so you could be made bankrupt as a result of decisions of the other directors, even in a limited liability company.

If you disagree with the decisions being made, have it noted in the minutes, including your reasons for disagreeing.

You could be disqualified from acting as a director for some types of conduct.

  • They include continuing to trade when the company is insolvent, failure to keep proper accounting records, failure to pay tax and failure to co-operate with the official receiver.
  • Disqualification lasts from two to 15 years.

Some actions could result in criminal convictions.

  • They include failure to keep proper accounting records, fraudulent trading, health and safety shortcomings and misappropriation of company funds.

Avoiding Danger

Monitor the financial situation of the company continuously, whether or not you are the financial director.

Take steps to minimise losses to creditors if the company is in, or seems likely to face, financial difficulties.

  • Ask an insolvency practitioner to advise the board. Take detailed minutes of the meeting.
  • Make sure that minutes of directors’ meetings are maintained in any event.
  • They could protect you against future legal action, particularly where there have been boardroom disagreements.
  • Keep in mind the requirements of your employment contract and powers granted under the Articles.
  • Whenever possible, avoid giving personal guarantees of the company’s debts.

Leave a Reply