Directors of failing or insolvent companies

As the director of a company you are expected to undertake certain duties and it is important that you uphold your responsibilities even if your company is facing insolvency. Not doing so could potentially cause you to be held personally liable for the losses caused and even lead to disqualification. Our experienced team of business recovery solicitors can help if you need advice as the director of a failing or insolvent business.

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Director’s duties

The general duties of a director are set out in the Companies Act 2006. The duties that you owe to the business include:

  • To act in accordance with the company’s constitution
  • To promote the success of the company which includes acting in the company’s best interests
  • To exercise independent judgment
  • To exercise reasonable care, skill and diligence
  • To avoid conflicts of interest
  • Not to accept benefits from third parties and,
  • To declare an interest in proposed transaction or arrangement.

If your company becomes insolvent or is uncertain of insolvency the interests of your creditors must be considered and you are not free to take action which puts the creditors at risk of not being paid. The interests of the creditors must be considered as paramount rather than being given equal consideration alongside those of the shareholders.

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
  • Misfeasance
  • 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’.

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What can a director be disqualified for?

Under the Company Directors Disqualification Act 1986 there are several reason which could cause you to face disqualification, all which carry a maximum disqualification period of either five or 15 years.

Reason for disqualification

Maximum period of disqualification

Convicted of an offence in connection to the promotion, formation, management or liquidation of a company.15 years


Three defaults in the previous five years concerning the filing of documents and returns.

5 years

Found guilty of an offence of fraudulent trading or of any fraud in respect of the company or any breach of the duties of a director.

15 years

Convicted of a summary offence regarding the filing of returns, accounts or other documents.

5 years

If the company goes into liquidation or administration and the Secretary of State applies for disqualification due to the director being unfit to be concerned with the management of a company.

15 years

If the Secretary of State makes an application to disqualify on the grounds of unfitness after a report by an official inspector.

15 years

Our business recovery solicitors are experts when it comes to advising directors of distressed and insolvent businesses of their duties and obligations. We can offer business directors professional, impartial advice about how to manage insolvency and ensure they meet all of their director duties during the ongoing insolvency process.

If you would like to know more about your legal obligations as a company director, and how Stephensons can help if your business is distressed or operating in insolvency, call us today on 0203 816 9303.

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