As the director of an insolvent company you have certain duties and responsibilities.

  • To consider the interests of creditors above those of members. Directors have a duty to act in the interests of the shareholders in general when a company is solvent. However, when a company is insolvent, the position changes and creditors come first.
  • To take steps to avoid loss to creditors. Under insolvency legislation, a director will be personally liable for wrongful trading if a liquidator can show that they knew or ought to have concluded there was no reasonable prospect of avoiding liquidation but continued to do business as “normal”. Liability will not arise if the director can show (to the court’s satisfaction) that they took every possible step to minimise the potential loss to the company’s creditors. They must be seen to have actively tried to do this. If you fail to uphold these responsibilities you could be accused of wrongful trading and held personally liable for the repayment of certain company debts.

    When judging what the director knew or ought to have concluded, and the steps he should have taken, the court asks itself two questions:

    • First, it looks at the director’s functions. It asks what a reasonably diligent person with the general knowledge, skill and experience required of someone exercising those functions would have concluded and the steps he would have taken. This is an objective test, under which, say, a finance director will be expected to reach the minimum threshold of competence required of all finance directors.
    • First, it looks at the directors functions. It asks what a reasonably diligent person with the general knowledge, skill and experience required of someone exercising those functions would have concluded and the steps he would have taken. This is an objective test, under which, say, a finance director will be expected to reach the minimum threshold of competence required of all finance directors.
  • Not to enter into transactions at an undervalue, or make preferences. Insolvency legislation permits an administrator or liquidator of a company to apply to a court to set aside or vary transactions at an undervalue as well as preferences entered into within a specified period before insolvency proceedings began. In setting a transaction aside, a court will make an order to restore the position to what it would have been had the transaction not taken place. This may result in personal liability for the directors of the company and disqualification proceedings against any director responsible for the transaction concerned.

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