Tuesday, 3 October 2017

Company Crashes: Can the Directors be held liable to creditors?

The crash of Monarch Airlines has raised the question Are the directors personally liable for  
the company's debts? I am not going to answer that one and nothing here should be taken to suggest that any of the Monarch directors bear personal responsibility for money owed to their customers and others. But what I am going to do is deal with the position of company directors generally when the business collapses. There's a chapter devoted to this in my book   Breaking Law but here's the law of England and Wales in a nutshell.

As a general rule, directors are not personally responsible for the debts or contract breaches of their company. A notable exception is someone who was a director at a time when they was disqualified from holding that position or had given an undertaking not to act as a director. But there are other exceptions. Where a director has been up to monkey business  - fraudulent or wrongful trading, they call it - before the company went bust, the liquidator can apply to the court for them to make a contribution towards company debts. Continuing to trade and take in money at a time when the director knew or ought to have known that the company had no reasonable prospect of avoiding collapse may be enough.

And for misconduct after 30 September 2015 there's a new attack which the secretary of state can make on behalf of creditors who have lost out under the Small Business, Enterprise and Employment Act 2015 where disqualification proceedings have been successfully brought against a director in relation to conduct which has caused the loss.  Disqualification proceedings can even be avoided on the strength of a director's undertaking to pay compensation to aggrieved creditors.