Q&A: Personal liability of a managing director during an insolvency

May 16, 2012

This article was first written for and featured in Financial Times.

QUESTION:

I am the managing director of a medium-sized machine products distributor. We have been badly affected by the downturn and are going into insolvency. But on top of the stress of insolvency, I am worried that I will also be facing a lawsuit, as one of our shareholders is arguing that we should have realised we would go into liquidation and have stopped trading earlier. Although I was aware there were cash flow problems a couple of years ago, I took active steps to secure investment and manage the debt. Does this make me personally liable?

ANSWER:

When there are doubts. about a company's solvency, the directors' duty is to manage the business in a manner that protects the interests of the creditors as a whole. Directors should be aware that they can be personally liable if they continue to trade when there is no reasonable prospect of saving the business. They can also be banned from being directors.

However, this does not mean they should resign or stop trading at the first sign of problems. A recent case involving Langreen Limited provides some comfort, as it shows that a court will not impose sanctions if directors can prove they made honest and rational commercial decisions to protect the interests of creditors (even if they eventually turned out to be wrong).

To have the best chance of proving this, directors should hold regular minuted meetings, formulate specific areas of responsibility and take professional advice. Your "active steps" to secure investment and manage the debt could help protect your position.


Related pages:

Corporate more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Paul Taylor
Partner
Direct dial: +44 (0)20 7614 2512
ptaylor@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze