Where a company is insolvent i.e. unable to pay its debts as they arise are in liquidation, the directors have further duties and responsibilities to the liquidator or other inolvency officer. A director of an insolvent company can be made personally liable without limitation of liability where the court finds that he has been a party to reckless or fraudulent trading.
He may be so deemed if he was party to the carrying on of the business when he ought to have known having regard to his general knowledge, skills and experience, that it would cause loss to the creditors of the company or any of them. He is also so deemed where he was party to the contracting of a debt by the company and did not honestly believe on reasonable grounds, that the company would be able to pay the debt as it fell due. Fraudulent trading is also a criminal offence.
In a winding up, the directors must cooperate with the liquidator or other insolvency officer, such as a receiver or an examiner. Where a company is being wound up and a director is found to have misapplied or retained any company property, has misused his powers or otherwise breached his duties to the company, then an application may be made to court for recovery of the monies or assets concerned and /or payment of compensation. The liquidator or certain other persons including creditors, may make the application. Any such arrangement is avoidable upon the application of the company.
If the company is being wound up and is insolvent, the court may if it determines the arrangement materially contributed to the insolvency, declare that any person who benefited from the arrangement is personally liable without limitation of liability for all such part of the company debt as may be specified.
Where a company is proposed to be voluntarily wound up i.e. without involvement creditors, a declaration of solvency is required to the effect that the company is able to pay its debts in full. Directors may be liable personally, if they make the declaration without having reasonable grounds for their opinion as to the solvency of the company.
In a voluntary creditors’ based insolvency or a court-ordered winding up, the directors have certain duties to cooperate with the liquidator. In addition, they have obligations to give a full statement of the company’s affairs together with lists of creditors within certain time limits. The failure to do so is a category three offence.
Offences and Consequences
A director who in purported compliance with the Companies Act, provides an explanation statement or signs a document or return (including accounts) that are false in any material respect, is guilty of a category two offence. It is an offence to destroy mutilate or falsify any document or record or be privy to any such action. A breach is a category two offence.
Where an officer of the company fraudulently parts with, alters or makes an omission in any book, document in relation to the company or its affairs or is a party to the fraudulent altering or making or omission is guilty of a category two offence.
The company’s duties to keep adequate accounting records and prepare financial statements are set out elsewhere. It is an offence for a director to fail to take reasonable steps to ensure compliance with this obligation.
If the company is being wound up and is unable to pay its debts or has contravened the basic obligation to maintain accounts, the court may, if it considers that the contravention contributed to the company’s inability to pay its debts resulted in substantial uncertainty as to its assets and liabilities, may hold a director or former director personally liable without limitation of liability for all or part of the debts of the company, as may be specified by the court.