One of the most important characteristics of a corporation is the limited liability protection it provides. A corporation is a legal entity that exists independently of its stockholders and is founded under state law. Limited liability shields shareholders, directors, officers, and employees from personal liability for corporate debts and activities performed in the name of the company. A corporation’s officer, whether he or she is also a shareholder, director, or employee, cannot normally be held personally accountable.
Can the director be held personally liable for any of the company debts?
A liability is a phrase used in business to describe a sum of money or other debt owing by a corporation. This could be in the form of a loan, a hire purchase agreement, or an overdue invoice. The capacity to operate as a limited corporation has long been touted as a significant benefit. But, exactly, what does “limited liability” imply? Simply defined, limited liability is an extra layer of protection between the firm and its directors. This means that if the corporation is unable to pay its debts, the directors cannot be held personally liable.
Is a board of director liable for company debts?
Directors of a corporation are jointly and severally accountable to the corporation’s employees for all debts not exceeding six months’ salary and up to 12 months’ vacancies pay under section 131 of the OBCA.
Directors may also be held personally liable for certain taxes if the corporation fails to remit source deductions (employee income taxes, Employment Insurance, and Canada Pension Plan contributions), as well as unpaid employee wages and vacation pay, as required by s.227(1) of the Income Tax Act, or fails to remit HST collected under s.323 of the Excise Tax Act.
The corporation, its owners, creditors, employees, and government authorities are all involved in these instances.
Directors may also be held personally accountable for damages resulting from their conduct or inactions, including but not limited to illegal acts that would violate their fiduciary or statutory obligations under the act.
In addition, directors may be held personally accountable for torts committed individually or on behalf of the corporation if they allow the corporation to act outside of its authority. Finally, directors may be held personally accountable if the corporation is used to commit fraud. The act of piercing the corporate veil is known as piercing the corporate veil.
Directors are accountable to employees for up to six months’ earnings if the company goes bankrupt or goes into liquidation, according to the Government of Canada’s Wage Earner Protection Program (WEPP). Employees who earned or became entitled to unpaid wages, vacation money, termination pay, or severance pay in the previous six months before a bankruptcy or receivership may be eligible for reimbursement under this scheme.
When an employee applies for WEPP payments, he or she agrees to authorize the Government of Canada to subrogate his or her claim up to the amount of the WEPP payment. When the assets of the insolvent employer are allocated through the bankruptcy and receivership process, the government will endeavor to reclaim the amount it has paid under the program from the estate or property of the insolvent employer.
Employees should be advised, however, that any claim must be filed within six months of the payment due date or within six months of any bankruptcy or liquidation proceedings. Directors will not be held accountable if allegations are filed beyond that time frame. Furthermore, a director’s obligation for unpaid salaries is limited to two years after he or she has ceased to be a director.
Every individual, including the corporation’s directors, who creates or assists in falsifying prospectuses or other public business disclosure papers is guilty of an offence under section 256(2) of the OBCA. On conviction, he faces a fine of not more than $2,000.00 or a period of imprisonment of not more than one year, or both; if the person is a corporation, he faces a fine of not more than $25,000.00.
The directors of a corporation are in charge of distributing funds to shareholders through dividend payments, share redemption, and buyback. Directors must verify that the corporation can pass two financial tests before making any payments to shareholders:
- When it comes to making payments to shareholders, the organization must be solvent, which means it must be able to meet its financial obligations and commitments on time.
- The Capital Impairment Test demands that the realizable worth of a corporation’s assets be at least equal to the sum of its obligations before any payment is made.
The rationale behind these restrictions is that payments to shareholders should not be made if they would be detrimental to the corporation’s creditors. If the shareholders are paid without the director being satisfied, the director will be personally accountable to the creditors for the amount owing, according to the reasonable belief test.
It’s vital to understand that legal directors aren’t the only ones who might be held liable. The concept of a “de facto director” has been incorporated into the legislation to determine liability. A ‘de jure director’ is a director who has been officially appointed to this post in line with the law. A ‘de facto director,’ on the other hand, is a director ‘in fact,’ who acts in the capacity of a director while not having been formally nominated to that role. Under tax law and other civil statutes, a ‘de facto director’ can be held liable.
A corporation may indemnify a director to the extent of their liability and seek proper insurance to safeguard directors and former directors from personal liabilities incurred as a result of their functioning as directors, according to certain Canadian corporation statutes. These exemptions are conditional on the director acting reasonably under his or her duty of care and in accordance with his or her fiduciary duties, and on the basis of his or her belief that his or her actions were legal and in the best interests of the corporation. The inclusion of director indemnity provisions in a corporation’s bylaws is widespread.
The main topic of directors’ personal duties or obligations is to strike a balance between the corporation’s needs and their own interests, as well as between the interests of shareholders and the corporation’s creditors. The liability that follows a breach of these duties is frequently in the form of remuneration, which reduces the incentive to break these obligations.
Because participating as a director of a business carries a lot of risk, you should contact a knowledgeable and experienced lawyer to help you understand your rights and duties under corporate law.
When could directors be liable for the debts of their company?
“Can I be held personally accountable for my company’s debts?” is a question that many directors ask when their firm is insolvent.
And, as with so many other insolvency, liquidation, and bankruptcy problems, the answer is “it depends.”
Here are five scenarios in which a director of a bankrupt firm could be held personally accountable for its debts:
The first three are limited to insolvency circumstances, which are brought about by either liquidators or creditors under the Corporations Act 2001 (“the Act”). In the latter two categories, however, this is not the case, and the director can be held accountable for the company’s debts whether the firm is insolvent or not.
A director may be held accountable for any outstanding debts incurred by the company while it was bankrupt. When the external administrator is appointed, this sum is determined.
The director, however, can defend the insolvent trading claim under Section 588H of the Act by arguing that they:
- Due to illness, he had not been able to participate in the company’s management (or another good reason)
This occurs when a firm provides an undue benefit to a director, a close associate, or a nominee by:
“… if a reasonable person in the firm’s circumstances would not have entered into the transaction, taking into account the benefits (if any) and costs (if any) to the company entering the transaction, as well as the benefits to the other party to the transaction.”
The director may be held accountable for any losses incurred by the firm as a result of the transaction.
If the firm enters into an agreement or transaction that reduces the assets available to fulfill employee entitlements, a director may be held accountable in a liquidation scenario. The agreement must be entered into with one of the following goals in mind:
- The amount of employee entitlements that can be recovered is drastically reduced.
A director may be held accountable for any losses incurred by the firm as a result of the transaction.
A director can be held accountable under a Personal Guarantee if he or she promises to pay a debt to a creditor when the firm is unable to do so.
Unless the firm is in voluntary administration, a personal guarantee can be enforced against a director at any time. A creditor must wait until the voluntary administration has concluded before pursuing their promise in this situation.
If a director settles the company’s debt in full, they have the authority to replace the creditor who was paid, effectively making them a creditor in their own right.
Sole Proprietorship
A sole proprietorship is not a legal entity in its own right. If you’re the lone owner of your business and haven’t incorporated or set up a certain type of business structure, you’re most likely a sole proprietor. You and your company are both responsible for the company’s debts.
Because a sole proprietorship does not provide its owner with restricted responsibility, creditors of the business can seize both personal and corporate assets. This implies that if your company doesn’t have enough assets, creditors may sue you and try to recover the loan by seizing your home, car, or other personal belongings.
Partnership
A partnership is a type of business that is held by two or more people. With some exceptions for hybrid versions, liability is more akin to that of a lone proprietor than a corporation in many ways.
- Partnership in general. If two or more persons agree to carry on a company or activity for profit, a general partnership can be formed without any documentation. Each partner is a general partner, and is individually liable for the partnership’s debts. If your company is a general partnership, you will be accountable for all of the company’s obligations.
- This is a limited partnership. There must be at least one general partner and at least one limited partner in a limited partnership. The limited partner is not personally accountable for the partnership’s debts, whereas the general partner is. This means that creditors can access the general partner’s personal assets but not the limited partner’s.
- Limited-liability corporation. An LLP is intended to protect all partners from personal accountability for the company’s debts. All partners have limited responsibility in some states, however some states require an LLP to have at least one general partner. Furthermore, in some areas, the LLP’s liability protection only applies to negligence claims, thus all partners may still be accountable for contract debts (such as business loans or credit cards).
Corporation
A corporation is a legal body created to restrict the liabilities of its stockholders (called shareholders). In most cases, stockholders are not individually accountable for the corporation’s debts. Creditors can only collect on their debts by seizing the company’s assets.
Shareholders are normally only liable if they signed a cosigner agreement or personally guaranteed the company’s debts. However, if a creditor can show that corporate formalities were not followed, shareholders mixed personal and business cash, or the corporation was only a shell created to conceal liabilities, shareholders may be held accountable. The act of piercing the corporate veil is known as piercing the corporate veil.
Limited Liability Company (LLC)
An LLC, like a corporation, provides its owners with limited liability (called members). Members are generally not liable for the LLC’s debts unless they personally cosigned or guaranteed the debt. By penetrating the corporate veil, creditors may be able to pursue the members’ personal assets, just as they might with a corporation.
If you personally guarantee a company loan
If your firm has a bad credit history, is small, or isn’t well established, financial providers may ask for a personal guarantee before accepting a loan. When the time comes, if you are unable to repay or if your business fails, the creditors will turn to you for payment. You will be held accountable on a personal level. If you don’t have the necessary capital, your home and other personal belongings may be at stake if you go bankrupt. Here’s where you may learn more about directors’ personal guarantees.
If you have borrowed from lenders and they insist on a charge over your house in addition to a personal guarantee
When you take out a business loan, the lenders may be concerned that you will not be able or willing to repay the loan if something goes wrong, therefore they may request a charge on your home. Some lenders may be out of money if your firm goes bankrupt and additional creditor measures, such as calling on personal guarantees, are taken. In certain cases, the lender may require a charge on your property as additional security. This means that when or if the property is sold, it will be paid before other creditors.
Note: Any of the COVID recovery loans, such as the Bounce Back Loan or Recovery Loan, cannot be secured against the directors primary house.
If you have an overdrawn directors account
It is quite normal for directors to have a loan account that is overdrawn. This occurs when a director withdraws funds from the firm for personal use, yet it must be reimbursed and accounted for as any other transaction. The problem arises when the business fails and the loan is not repaid. Because you are a corporation debtor, the liquidator or administrator will pursue the money. Personal bankruptcy is a risk that could result in your home being repossessed.
If you are found to be guilty of wrongful or fraudulent trading
When the professional insolvency practitioner investigates the actions of the director(s) as part of the insolvency process, they may discover that you, as the director, have knowingly neglected creditor interests and knowingly heaped on debt that cannot be repaid. This is a significant violation of the Insolvency Act, and you could face personal liability for any or all of the company’s debt. Such proceedings against directors are uncommon, although they do occur.
So, if you acted as a director without any personal guarantees, didn’t trade illegally, and can repay your overdrawn directors account, you shouldn’t be concerned. Your home is not in jeopardy. If you’re unsure or need more information, contact one of our experts right away.
Can personal assets of directors be seized from a Ltd company?
Limited company directors occasionally contact us, afraid that bailiffs acting on the orders of enraged creditors may remove personal property from their business facilities.
Personal property is never included in corporate debt for limited company directors, as noted above. The above-mentioned issue of misfeasance is only considered after insolvency, therefore your personal belongings are fully outside limits during the baliffs stage.
Baliffs have no legal authority to seize personal property in any circumstance. They can take company assets, but only those that are owned by the company, and nothing that is on a hire-purchase basis.
Except for High Court enforcement agents with a warrant, no bailiffs have the authority to compel entry into a business.
What happens to directors when company goes into liquidation?
A court decision determining that an insolvent firm should be wound up and liquidated is known as a winding up order.
After an unpaid creditor of the firm being wound up has successfully initiated a winding up petition against that corporation for the unpaid debts, the courts will issue a winding up order.
What Happens Next for Company Directors?
The courts first appoint an Official Receiver. The liquidation process is overseen by the Official Receiver.
The directors virtually lose their decision-making powers once the Official Receiver is appointed, albeit they will be obligated to cooperate with the Official Receiver in providing all necessary information and facilitating the liquidation process.
As a director, you should work with the Official Receiver to the utmost extent possible.
The Official Receiver will immediately begin an examination into the company in order to analyze its current situation. They must announce whether they intend to operate as the company’s liquidation or designate a separate liquidator within 12 weeks of their appointment.
Following the Official Receiver’s ruling, the liquidation will proceed in the usual manner. In summary, the liquidator, the Official Receiver, or both will be in charge of realizing the company’s assets and distributing the proceeds to creditors.
Official Receiver’s Investigation Into Directors’ Conduct
Prior to the winding-up order, the Official Receiver must investigate the acts of the company’s directors as part of the obligatory liquidation procedure.
Each director must meet with the Official Receiver for a two-hour interview during which they will be asked to produce a statement of the company’s affairs and outline the circumstances leading up to the company’s insolvency.
It is critical that you prepare properly for this interview as a director. To submit to the Official Receiver, you’ll need all appropriate information, including accounts and statements.
The Official Receiver has the authority to summon a director to court for questioning. This is an extremely rare occurrence, and it’s only employed in cases where the director is suspected of serious misbehavior.
As part of their investigation, an Official Receiver will be looking for three items in particular:
Unfair Preference
When a corporation takes particular activities that put a creditor in a better position than they would have been on an asset distribution during a winding up than they would have been otherwise. These activities had to be deliberate (but if the creditor is a linked party to the corporation (i.e. a director), it’s assumed they were).
Reporting to the Department of Department for Business, Energy & Industrial Strategy
After conducting their inquiry, the Official Receiver must submit a report to the Department of Business, Energy, and Industrial Strategy with recommendations on whether any consequences against the company’s director should be imposed (s).
The punishments for all three of the aforementioned offenses might result in the directors being barred from acting as directors for up to 15 years. There are also specific rights of action that can be granted to the liquidator, such as the ability to reverse any undervalued transaction or hold the directors personally accountable for the amount of the undervalue.
Though this may appear to be quite concerning, these sanctions are only applied in cases where there has been director misconduct and are in place to protect the company’s creditors. Sanctions are not lightly meted out, and they will only be imposed after a thorough inquiry.
Proceeds from the Liquidation
Any proceeds realized from the company’s assets will be paid to the company’s creditors as the company nears the end of its liquidation process.
Because the corporation was insolvent, the directors will not get any proceeds in their capacity as stockholders. A director, on the other hand, may be a creditor of the company in some other role. The amount of money recovered through the liquidation process, as well as their position in the pre-determined order of precedence for creditors, will determine whether they get payment on these debts.
Closure of the Company
After the proceeds have been distributed, the Official Receiver will convene a meeting of creditors and make a final report. They will also be relieved of their responsibilities, and the company will be closed down completely.
Are directors liable for HMRC debts?
Only if the failure to pay VAT is deemed purposeful and the company is insolvent or will be insolvent soon can company directors be held personally accountable for the repayment of VAT tax bills. Another authority HMRC has in relation to VAT liabilities is the ability to demand VAT security for any future enterprises the bankrupt company’s director is involved in. This VAT security might amount to a substantial number of money, making it difficult to start a new business.
Can a bailiff take personal items for a limited company debt?
Debts owing by sole traders are subject to personal liability, which means that the director can be held personally liable for any amount their company fails to pay. Limited company directors, on the other hand, are protected from liability.
–Items that are not held by the company; nevertheless, you must establish this by presenting documentation of a monetary transaction.
If a bailiff has taken assets that are not corporate owned but you were unable to verify this on the day, you have seven days to present proof of ownership after they have taken custody of the goods.
Unless the debt being called upon has been personally guaranteed by the director, limited company owners are not personally accountable for their corporate debts, and bailiffs can only seize company assets.
Certain (non-essential) personal assets may be taken in this situation, but nothing that is related to finance.
Can you close a limited company with debt?
In short, yes, you can close a limited company with debts and start over, but there are tight procedures to follow, and the repercussions can be severe if it is claimed that it was done fraudulently.
If you are the director of a company that is being crushed by massive debts, closing it may be the best option so that you may start a new business without having to worry about the debts and other issues that come with them.
Can you sue a director of a dissolved company?
There are a variety of reasons why you would want to file a claim against a defunct business. It could be due to faulty items or poor workmanship. If you worked for that company, you may be entitled to a pension or compensation for illness or injury that occurred as a result of your work.
Making such claims is difficult enough at the best of circumstances, but what happens if the corporation in question no longer exists?
When a corporation is dissolved, its assets are transferred to the Crown. The Latin phrase for this process is Bona Vacantia, which means “ownerless property.” Land, mortgages, stocks, and intellectual property are all examples of property that could be affected. The firm is deregistered from the Companies Register and ceases to exist as a legal entity.
It is impossible to pursue legal action against a corporation that does not exist, therefore if you want to file a claim against one, you must first reregister it. You’ll need a court order to accomplish this.
There is a legal procedure for restoring a firm to the register, but you must meet specific criteria to take advantage of it. If you were a director or shareholder at the time of the dissolution, or if you’re in charge of the pension fund, you should take this line of action.
Otherwise, you must have done business with the company or worked for them in the past. If the firm owing you money at the time of its dissolution, or if you have a competing interest in land or assets held in the company’s name, you can use this strategy.
So you meet at least one of those requirements and want to reinstate the business. So, what’s next?
Under the requirements of section 1029 of the Companies Act (2006), a company can be restored for up to six years after it has been dissolved. You’ll need to fill out a ‘Claim to Restore by Court Order’ form to do so (N208). You must pay a fee and provide a witness statement describing your application’s rationale.
If your claim is approved, you will obtain an order that must be forwarded to the Registrar of Companies by you. They will finish the restoration’s practical aspects.
You have three alternatives for pursuing your claim once the corporation has been restored: obtain a court judgment for the amount owed, submit a statutory demand, or file a winding up petition.
