If a company has a number of debts, you may wonder if a director in the organisation can be held accountable for the debts. By incorporating a business and forming a private limited company, or Ltd, you earn protection in this regard. Having limited liability permits shareholders to invest in a company safely and without worry. They can also rest assured knowing that their assets and finances are safe.
However, some instances are not always so clear. Some scenarios develop that can cause a director or shareholder to be held accountable for company debts. In this instance, the director may be held liable for a percentage of the debts. To learn more about this possible development, you need to answer the question, “When can directors be personally liable?”
Your Statutory Duty
If a business becomes insolvent or can no longer afford to pay its obligation, the directors possess a statutory duty to act in the best interests of the creditors of a business. For instance, directors should not continue paying dividends to shareholders if the company has gone belly up. They should also continue trading without the intent of repaying their creditors. By attempting to repay debts through dishonest transactions, they can be held legally accountable. They should also not try to sell assets for under their market values. It is also not a good idea to repay certain creditors, but not others.
As you can see, if a company becomes insolvent, directors are indeed held accountable, and held to a very high standard. That is why you need to know what your obligations are if you become a director of a company. Make sure you treat your shareholders and colleagues equitably and ethically. Otherwise, you can be in hot water – water that can damage your reputation and overall credibility.
Liquidating a Company
The liquidator of a company that is insolvent must check the actions of a company’s director during the time that led up to the insolvency. If they do find that a director was involved in wrongful trading or a similar activity, they can request an order from the courts – one that will make the director personally liable for the business’s assets.
If you are a director of an insolvent business, you need to seek legal advice from a practitioner immediately. Take the advice seriously so you can act in the interests of your company’s creditors. Show that you have done everything possible to ensure repayment has been made.
When attempting to secure financing, sometimes banks or suppliers may ask directors of a limited company to offer a personal guarantee. That means if a company cannot repay the financing, the director will take care of the repayment personally. In some instances, some banks may ask that a director use his personal assets or home as collateral or security for a loan. If the company defaults, the personal assets may possibly be repossessed. Some things are set in stone, especially when it comes to securing a loan. Make sure you can handle repayment if you are a director of a limited company.