What happens if a director fails to carry out their duties?
When a company is solvent it is up to the shareholders of the business to approve in advance or approve retrospectively the actions taken by the director.
However, if your company becomes insolvent and enters into administration or liquidation your actions as a director may be subject to investigation by the administrator or liquidator. Administrators have the power to bring claims for fraudulent or wrongful trading and you could potentially be held personally liable for the loss caused.
Since October 2015 it has been possible for administrators and liquidators to assign a right of action regarding claims for fraudulent trading, wrongful trading, transactions at an undervalue, preferences and extortionate credit transactions. Therefore, whilst administrators or liquidators may not have funds to prosecute any such action there a number of third parties who specialise in acquiring these actions and have the funds to prosecute these actions.
What can a director be held liable for?
There are a variety of claims that could be made against you including:
- Wrongful trading
- Repayment of director’s loan accounts
- Transactions defrauding creditors
- Transactions at an undervalue
- Fraud in anticipation of winding up
- Transactions in fraud of creditors
- False representations to creditors
- Fraudulent trading
People who have not been formally appointed as a director may also be held liable. Shadow directors are defined in the Insolvency Act 1986 as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.