Assume you are a director of a struggling firm that owns and operates a small business that has suffered considerable losses over the last three years and is unable to pay its creditors. You and the other directors, as well as management, are considering applying for bankruptcy protection, but believe that if the firm can function for another 12 months, it will break even and its prospects will improve. You and the rest of the board agree certain moves that will allow the company to limp along for another 12 months, including borrowing extra debt secured by the company’s final unencumbered assets. Unfortunately, a year later, those efforts have proven futile, and the company is now worth far less than it was a year ago in terms of liquidation value. Did you establish personal culpability by prolonging the company’s misery, reducing the value of the company to its creditors in a bankruptcy proceeding?
This graphic clearly shows that not everything is worth saving, and that it is sometimes preferable to take immediate but painful action to avoid future loss. In many business reorganization circumstances, this is undoubtedly the case. While shareholders, directors, and officers often try to save and keep their company alive despite the fact that the company’s chances of survival are small, there is a major risk involved. Under the so-called “deepening insolvency” doctrine, keeping a firm alive when it is plainly beyond recovery can result in personal culpability for the company’s directors, officers, professionals, and even lenders. According to the deepening insolvency hypothesis, a director or executive can be held accountable for extending the existence of a financially challenged company while lowering its liquidation value. This article will quickly address the general responsibilities of directors and officers, as well as the deepening insolvency concept, and will offer some advice to directors and officers of financially distressed businesses.
Directors’ and Officers’ Duties
Directors and officers owe the corporation and its shareholders fiduciary and loyalty duties. The duty of care compels directors and executives to carry out their responsibilities honestly and in the best interests of the company. Self-dealing, usurpation of business chances, and earning improper personal benefits are all prohibited under the duty of loyalty. In general, the business judgment rule protects the actions of directors and officers, which states that the courts will not second-guess actions taken by directors and officers if they acted on an informed basis, in good faith, and in the honest belief that such actions would be in the best interests of the corporation.
Many courts have ruled that when a corporation becomes bankrupt, the directors’ and officers’ fiduciary responsibilities are owed to the creditors, not the corporation or the shareholders. The fiduciary duties of directors and officers are less obvious when a corporation is in the “vicinity of insolvency.” In addition to the company and its shareholders, many courts have extended the fiduciary duties of directors and officers to the corporation’s creditors and other constituents. The word “insolvency proximity” has yet to be defined. Due to the lack of a clear legal definition of “vicinity of bankruptcy” and the fact that directors and officers may owe fiduciary duties to several parties, directors and officers sometimes find themselves in a conundrum as to when and to whom they should execute their fiduciary duties.
Deepening Insolvency Theory
Directors and executives face a potential conflict between their fiduciary obligations owed to the corporation and its shareholders in maximizing profit and their fiduciary duties owed to creditors in protecting and conserving corporate assets when firms approach the “vicinity of insolvency.” When a company approaches insolvency, some of the most important questions are whether the company should declare bankruptcy, when it should declare bankruptcy, and if the directors’ and officers’ activities would prevent or exacerbate the insolvency. According to the “deepening insolvency” theory, if a corporation’s directors and officers increase corporate debt and extend its life, the directors and officers may be held liable because the corporation’s continued operations have the effect of increasing losses and deepening its insolvency, lowering the value of its assets and harming creditors. According to one bankruptcy court,
“The Debtor’s condition was not like that of someone who has been sitting in the rain all day and cannot get much wetter. It’s more analogous to a boxer with one black eye who, although being hurt, may still fight and win. If such fighter (debtor) loses the bout and ends up in the hospital (bankruptcy court), a doctor (judge) can conclude that it was the extra injuries (deepening insolvency) that led to his hospitalization.” 1
The hypothesis of growing insolvency was first acknowledged as a damages theory. The tort of growing insolvency has recently been recognized by an increasing number of courts as a separate cause of action. The Court of Appeals for the Third Circuit held in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co. that the Pennsylvania Supreme Court could recognize the tort of deepening insolvency as “an injury to the Debtor’s corporate property resulting from the fraudulent expansion of corporate debt and prolongation of corporate life.” 2 The lawsuit contained allegations that certain third-party experts illegally influenced two lease-financing firms participating in a Ponzi scheme to issue fake debt certificates, causing their insolvency to worsen and compelling them to file for bankruptcy. 3 Deepening insolvency was recognized as a separate cause of action by the court for three reasons. It noted first that the theory was essentially sound because fraudulent and concealed debt can depreciate corporate property by forcing an insolvent corporation into bankruptcy, which incurs legal and administrative costs, creates operational limitations that impair the corporation’s ability to operate profitably, shakes the confidence of other parties who do business with the corporation, and undermines the corporation’s reputation. “These harms can be avoided, and the value within an insolvent corporation can be saved,” the court observed, “provided the corporation is liquidated in a timely way, rather than kept afloat with false debt.” 4 The soundness of the deepening insolvency cause of action, according to the court, was substantiated by the theory’s expanding acceptance, which included recognition by various federal and state courts. Finally, the court emphasized that where increasing insolvency causes injury to corporate assets, the law must provide a remedy by recognizing deepening insolvency as a cause of action, according to Pennsylvania jurisprudence.
The United States Bankruptcy Court for the District of Delaware concluded that the Delaware Supreme Court could accept increasing insolvency as a cause of action under Delaware law after using the Third Circuit’s methodology.
5 In the case of In re Exide Technologies, Inc., the corporation’s official committee of unsecured creditors sued the corporation’s pre-petition secured lenders, alleging that the secured lenders contributed to and were liable for the corporation’s deepening insolvency and eventual bankruptcy by extending credit to the corporation in exchange for additional collateral when the corporation had little or no hope of recovery, and causing the corporation to acquire additional collateral. 6 The Exide court determined that the deepening insolvency hypothesis was sound, judicially acknowledged, and conformed to the Delaware courts’ policy of providing a remedy for an injury, using the same criteria as in the Lafferty case. However, not all courts have acknowledged the theory as a distinct cause of action.
Elements of the Deepening Insolvency Theory
The elements or legal standards for a claim have not been stated by the Lafferty court, the Exide court, or any other court that has recognized the deepening insolvency cause of action. In general, two sorts of claims underpin the deepening insolvency cause of action: a mismanagement claim against directors and officers, and a misrepresentation claim against both management and its professionals, such as accountants. 7 Mismanagement claims against directors and officers are frequently based on the theory that the directors and officers violated their fiduciary duties by taking actions to artificially extend the life of the corporation, such as incurring additional debt, resulting in increased insolvency and the diminution and dissipation of the corporation’s assets and value. 8 These claims aren’t usually based on deception or other wrongdoing. The artificial or fraudulent prolongation of an insolvent corporation’s life, misrepresentation or omission of the corporation’s financial condition, and increased level of insolvency of the corporation caused by the prolongation and incurrence of additional debt are all common misrepresentation claims against management and professionals. Some cases, such as the Lafferty and Exide cases, include fraud or negligence. However, no court has addressed whether fraud or carelessness must be a part of the growing insolvency cause of action. As a result, while some courts have recognized the idea as a separate cause of action, the elements of that cause of action vary greatly between states and federal circuits.
Damages Under the Deepening Insolvency Theory
Similarly, the amount of damages in a case of growing insolvency is unclear. Damages under a deepening insolvency claim may include, among other things, legal and administrative costs caused by bankruptcy; impaired and lost ability of the corporation to operate profitably due to certain operational limitations that may be imposed on the corporation; lost profit and value due to the loss of confidence of other parties who have dealings with the corporation; and impairment of the corporation’s relationship with its creditors. However, the court did not explain how these products’ damages should be calculated.
Although the exact amount of damages is unknown, it is clear that directors and officers face greater risks of liability and damages, as the deepening insolvency theory creates a new and distinct cause of action for which liability and damages can be assessed, in addition to traditional causes of action like breach of fiduciary duty, misrepresentation, and fraud. The culpability under this approach is questionable because the courts have not set any boundaries to the increasing insolvency cause of action.
Protections Available to Directors and Officers
As previously stated, directors and officers have fiduciary responsibilities to the corporation and its shareholders. When a company becomes bankrupt, however, creditors are due fiduciary duties as well. In cases of worsening insolvency, the norm of care for directors and officials is unclear. In such cases, some courts have applied the business judgment rule to the acts of directors and officers, while others have found that the best interests of creditors take precedence. Even where the law recognizes that directors’ and officers’ duties include the creditors’ interest, the Delaware Chancery Court concluded that the business judgment rule applies. 9 The business judgment rule establishes a presumption that directors and officers behave in good faith and in the corporation’s best interests. As a result of the business judgment rule, directors and officers are protected from liability under the deepening insolvency theory. However, the rule does not totally protect directors and officers from accountability, especially as they may be held to a lower standard in the event of insolvency.
What Should be Done When the Business Faces Insolvency
As the number of courts that accept the deepening insolvency theory as a separate cause of action grows, directors and officers may face severe liability if they fail to assess the financial condition and the corporation’s chances of survival and recovery realistically. The possibility of severe personal liability for directors and officers, as well as professionals and lenders, remains because the courts have yet to identify any legal boundaries or measures of damages under this paradigm. What should directors and officers do if the company goes bankrupt?
First, directors and executives should assess the corporation’s future viability in a realistic and practical manner. They should keep in mind that not every business is worth continuing, and that doing so could expose the directors and officers to personal culpability under the increasing insolvency hypothesis. This isn’t to argue that if a company is about to go bankrupt, directors and officers should declare for bankruptcy as soon as possible to avoid personal accountability. The necessity and timeliness of filing for bankruptcy or reorganization should be a substantial part of the directors’ and officers’ assessment and judgment.
If the company’s chances of recovery are poor, directors and executives should be wary about taking on more or excessive debt. Similarly, when the corporation is on the verge of insolvency, directors and officers should be wary of issuing more security to secured lenders in order to extend the life of the business. Directors and officers should be aware that they may have fiduciary responsibilities to creditors in addition to the corporation and its shareholders.
As the company approaches insolvency, directors and officials should be aware of and actively monitor the financial status of the company. Directors and officials should use actual market valuations and be on the lookout for accounting errors in this regard.
Directors and officers should make sure that their official actions are covered under the corporation’s articles of incorporation or bylaws. The corporation should have enough liability insurance for its directors and executives.
Most importantly, directors and officers should follow the business judgment rule’s requirements, which include making informed decisions based on advice from financial and legal advisors when evaluating the corporation’s financial situation and recovery prospects, as well as determining the best course of action for the corporation. At this time in a corporation’s life, directors and officials must be aware that their exposure to personal liability is likely to increase. Furthermore, because the courts have not defined any limits to a claim of worsening insolvency, the possible responsibility of directors and officers remains unknown. In order to realistically evaluate the corporation’s condition, the risks connected with any proposed activities, the best course of action for the corporation to pursue, and the avoidance of liability for directors and officers, experienced financial and legal consultants should be engaged. In this regard, directors and officers should evaluate whether experts other than the corporation’s normal consultants should be involved in this process regarding the directors’ and officers’ personal liability.
Can a director be personally liable for company debts?
Because directors of private limited companies and limited liability partnerships are not personally liable for the company’s debts, many banks, suppliers, and landlords may refuse to offer credit or loan money to small firms without the owner’s personal guarantee.
If you signed a director’s personal guarantee on a loan, lease, or contract, you will be personally accountable if the company fails to pay. Personal guarantees are commonly requested on corporate vehicle or equipment loans, bank credit lines, and commercial leases.
In the case of a personal guarantee in liquidation, the circumstances change slightly. However, unless you have specifically pledged assets as security, the debt remains unsecured.
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 can directors be held personally liable?
Officers of the board of directors have a legal duty to act in the best interest of shareholders and maximize profits. While an officer of the board of directors has limited liability for actions taken on behalf of the corporation, if he violates his fiduciary duties and engages in self-dealing or otherwise prioritizes his or a related party’s interests over the corporation’s, the officer may be held personally liable.
Are directors personally liable?
Becoming a director confers prominence and a direct influence on a company’s strategy and success. How much leeway does a director have to act on his or her own? What responsibilities and obligations should a director be aware of?
This is the third of four articles outlining the general responsibilities and potential liabilities of an English private company director (which is not in a group with a PLC).
A company’s day-to-day management is delegated to its directors by its shareholders. The shareholders appoint the directors at first, and they can normally appoint more directors up to the limit stipulated by the articles of organization.
The board of directors makes decisions on behalf of the directors collectively. Unless just one director has been selected, a director cannot operate as a director on his own. At board meetings, decisions are made by a majority vote or by a written resolution signed by all of the directors.
The position and abilities of the director are essentially described in the articles of incorporation and, if he is also an employee, in his service contract.
Ordinarily, a director’s appointment does not provide executive authority. Most directors, on the other hand, are also firm workers with specific rights allocated to them. A managing director is typically given broad authority to make daily decisions on behalf of the organization. Other directors, such as sales and finance directors, will have a less role to play.
Directors have a responsibility to the firm and, if insolvency is a possibility, to creditors (see Directors andinsolvency). Under the Companies Act 2006, certain fundamental director responsibilities have been made statutory (the “Act”). The corporation is owed these responsibilities. (For further information, see What are the responsibilities of a director? Part I: statutory responsibilities, and Part II: other general responsibilities).
A variety of other statutory obligations and limits apply to directors. These include a responsibility to keep accurate books and records, as well as prohibitions on engaging in certain transactions with the firm or accepting loans from it. Breach of these responsibilities and standards can result in a director’s disqualification from acting as a director, as well as personal culpability in certain situations (see below). Some circumstances of personal liability can be covered by insurance.
Personal liability
A director may be personally liable in addition to the scenarios listed above, in which he or she may be obliged to account for cash received or indemnify the firm against losses incurred:
- If the firm fails to comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008 and fails to make the trading disclosures required by those Regulations (Regulation 10 of The Companies (Trading Disclosures) Regulations 2008), the company may be subject to a fine.
- Section 51 of the Act prohibits him from signing contracts supposedly on behalf of the firm before its incorporation.
- if he manages the firm while disqualified or on the orders of someone he knows is ineligible (section 15 of the Company Directors Disqualification Act 1986);
- if he was previously a director of a company that went into insolvent liquidation and is now involved in the carrying on of business by another company under a name that is the same as or similar to the insolvent company’s name within 12 months before it went into liquidation (section 217 of the Insolvency Act 1986);
- If The Pensions Regulator has issued him a contribution notice on the grounds that he was a party to, or knowingly assisted in, an act or failure to act, one of the main purposes of which was to remove or reduce an employer’s requirement or ability to pay a debt due under section 75 of the Pensions Act 1995 on the winding up of a pension scheme;
- If someone makes a false or negligent misrepresentation in the course of negotiating a contract between the company and a third party, he may be held liable for damages.
- Section 19 of the Theft Act 1968 defines making a false statement about a company’s affairs with the goal of deceiving shareholders or creditors as a criminal crime.
- under the criminal offences of dishonestly making an untrue or misleading representation where the person making it knows that it is, or might be, untrue or misleading, and dishonestly failing to disclose to another person information that he is legally obligated to disclose, both of which require the intent to make a profit or cause loss or risk of loss to another person (sections 2 and 3 of the Fraud Act 2006),
- If he is knowingly a party to a firm carrying on its business with the intent to mislead creditors of the company or another person, or for any fraudulent purpose (section 993 of the Act), he faces up to ten years in prison or a fine.
- if he fails to make it apparent that he is contracting on behalf of the firm and not as an individual;
- a third party for damages for violation of an implied warranty of authority if he concludes a contract on behalf of the company but does so outside of his authority, allowing the company to set the contract aside; or
- in regard to the company’s illegal or fraudulent trading under the Insolvency Act 1986 (see Directors and insolvency).
A number of legislation state that if a firm commits a criminal offense, a director is additionally responsible if the offense was committed with the consent or connivance of the director, or was attributable to any negligence on the part of the director. ‘Consent’ in this sense refers to being aware of what is going on and agreeing to it, whereas ‘connivance’ refers to awareness combined with a negligent refusal to prevent it. ‘Neglect’ implies that no knowledge of the matters constituting the offence is required; rather, there is a failure to act when obligated to do so.
Corruption and Bribery
The Bribery Act of 2010 (“BA 2010”) took effect on July 1, 2011. It broadens the definition of bribery to include all transactions in the private sector (previously, bribery offences were confined to transactionsinvolving public officials and their agents).
- soliciting, agreeing to receive, or accepting a bribe (section 2) is a general offence.
- Bribing a foreign public official to obtain or retain business is a separate crime (section 6); and
- Commercial organizations that fail to prohibit bribery by persons acting on their behalf, when the bribery was intended to achieve or keep a business advantage for the commercial organization, are subject to strict responsibility (section 7).
When a company (rather than just individuals acting on its behalf) is convicted of an offence under sections 1, 2 or 6 (offering or receiving a bribe, or corrupting a foreign public official), the company’s directors may be held accountable. If it can be proven that they “consented” to or “connived” in the bribery, they will be exonerated. While the terms “consent” and “connivance” aren’t defined, they’re understood to signify things like knowing there’s a good probability bribery is going on but doing nothing to investigate or stop it.
The director must have a close relationship to the UK, such as being a British citizen, an individual normally resident in the UK, or a British Overseas citizen, in order to be held accountable.
A director who is convicted of any of these crimes faces a maximum sentence of ten years in prison and/or an infinite fine. A director who is guilty of bribery could be barred from holding a directorship for up to 15 years.
If a company employee bribes another person for the company’s profit, the corporation commits an offence, subject to the “appropriate processes” defense stated below. The term “affiliated” with the company shall be interpreted broadly. If a person conducts services for or on behalf of the firm, regardless of the role in which they do so, they are considered “affiliated” with the company. This could include agents, employees, subsidiaries, middlemen, joint venture partners, and suppliers, all of whom could potentially be held liable for the company’s (and its group’s) actions.
Furthermore, this is a case of strict liability. This implies that a motivation does not need to be proven. If the corporation is found to be in violation of this clause, it could face an unlimited penalties.
If the corporation can show it had “sufficient procedures” in place to prevent bribery, it will have a defense. The BA 2010 does not define “appropriate procedures,” however the Ministry of Justice has provided guidance (“Guidance”) on what acceptable procedures might entail. This guidance lays out six principles for businesses to follow, all of which are intended to help businesses understand the types of practices they should implement to prevent bribery within their organization. These are the following:
While this is a corporate offense rather than a violation by individual directors, the board must be satisfied with the company’s overall strategy to bribery prevention. In addition to a general risk assessment of the firm’s business, it’s likely that a review of the company’s current procedures, in conjunction with the Guidance, will be required in order to put in place measures that ensure the company has”adequate procedures” in place to prevent bribery.
Health and Safety
Individual directors do not bear responsibility for health and safety issues; instead, the corporation has accountability. However, if a ‘body corporate’ commits a health and safety violation with the consent or connivance of a director, or if the violation is related to his negligence, he may be prosecuted (section 37 of the Health and Safety at Work etcAct 1974). (In this context, consent involves being aware of the circumstances and risks, whereas connivance means being aware of the risks but doing nothing about them.) Neglect is defined as a willful breach of a duty of care.) If convicted, a director might face up to two years in prison and an unlimited fine (Schedule 3A of the Health and Safety at Work etc Act 1974), as well as being barred from serving as a director for a length of time (section 2(1) of the Company Directors Disqualification Act 1986).
One of the goals of the Health and Safety Executive’s (“HSE”) enforcement policy statement is to guarantee that directors are held accountable in the courts if they fail to meet their health and safety obligations. Inspectors from the Health and Safety Executive have been advised to pay special attention to the management chain and the role played by individuals in any health and safety violations. Each year, the HSE’s annual report will name organizations and people found guilty of health and safety violations.
The HSE and the Institute of Directors have issued recommendations on corporate directors’ health and safety obligations, suggesting that each board:
- acknowledge their mutual responsibility for the organization’s health and safety leadership;
- guarantee that each board member accepts personal responsibility and ensures that their actions and decisions at work promote the board’s health and safety messages;
- Ensure that all choices are made in accordance with the organization’s health and safety policy;
- urge all levels of employees to take an active role in health and safety; and
- maintain current on key health and safety risk management topics, and evaluate its health and safety performance on a regular basis, at least once a year.
Although the suggestions are not legally binding, prosecutors may consider whether or not to pursue criminal charges against a director in the case of an accident if they are not followed. Implementation of the guidelines, on the other hand, should allow directors to demonstrate that they have followed the law.
Manslaughter
The common law offence of manslaughter by gross negligence applies to companies and persons (including corporate directors and management) when (according to R v Adomako3 AllER 79):
- The violation was so egregious that the defendant’s conduct may be considered criminal and deserving of punishment because the defendant showed such contempt for the deceased’s life.
An individual’s conviction for gross negligence The maximum sentence for manslaughter is life in jail.
The Corporate Manslaughter and Corporate Homicide Act 2007, which replaces the common law offence of manslaughter by gross negligence for companies, partnerships, trade unions, and other organizations in the UK, creates a new offence of corporate manslaughter (also known as corporate homicide in Scotland). A company is guilty of corporate manslaughter if it:
- A person’s death is caused by the way its operations are managed or organized;
- the death is caused by the organization’s gross breach of a duty of care owed to that person; and
- The senior management of the company had organized or handled the company’s activities in such a way that it was a significant part of the breach.
Individuals are not covered by the Corporate Manslaughter and Corporate Homicide Act, but if found guilty, an organization faces an unlimited fine.
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.
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.
Can a director be personally liable for misrepresentation?
In English law, deceptive statements are punishable both criminally and civilly.
In terms of civil liability, investors may be able to file a claim against the company or its directors if they can show that they purchased shares (or otherwise suffered a loss) as a result of the company or its directors making a false or misleading statement.
Most subscription agreements (indeed, most commercial contracts) will include a ‘entire agreement’ clause to protect claims for misrepresentation or careless misstatement.
Entire Agreement Clause
An complete agreement clause aims to prevent any party from relying on anything that isn’t specifically stated in the parties’ signed contract.
In the context of investing, such a clause would preclude investors from relying on marketing information, oral or written assertions about the company’s nature or value, or anything else not clearly stated in the subscription agreement.
Investors’ capacity to sue a firm for an innocent misrepresentation or careless misstatement may be severely limited by entire agreement restrictions. For example, if a business opportunity advertised in promotional material fails to materialize due to no fault of the company, an investor may be barred from pursuing a breach of contract action against the company.
Why use an entire agreement clause
Directors and corporations will be protected from innocent and negligent misstatements if an entire agreement provision is appropriately constructed. They cannot, however, shield the corporation or its directors from accountability for false statements.
Fraudulent Misrepresentation
An entire agreement clause cannot, by law, protect the firm or its directors from liability for fraud. There are four factors to a fraudulent misrepresentation action:
- The defendant either knows or is irresponsible about whether the representation is accurate or false.
- The claimant acts in reliance on the representation and suffers loss as a result.
When the individual making the statement honestly believes what they are expressing is accurate, there is no fraudulent misrepresentation. As a result, proving that comments made in an investment setting are false can be challenging.
The presence of an entire agreement clause in a share subscription agreement, on the other hand, may indicate that this is still the greatest option available to investors who have been harmed by misrepresentations that precede their contractual relationship with the company.
Directors are personally liable for their fraudulent misrepresentations
When a director makes a fraudulent misrepresentation with the intent that another person rely on it, and that person does so and suffers a loss as a result, the director is personally accountable.
One of the benefits of filing a claim for fraudulent misrepresentation is that the claimant can choose whether or not to sue the corporation or its directors. In actuality, the claim will very certainly be filed against the party with the most money.
Damages
Rescission (i.e. voiding) of the contract and damages are the remedies for misrepresentation. Even if the losses were not anticipated at the time of the contract, the courts will try to put the claimant in the position they would have been in if the fraud had not occurred. This is a really effective treatment.
Innocent or negligent misrepresentation may also result in damages and provide the claimant the right to cancel the contract, unless an entire agreement clause prevents such claims.
Other options shareholders rights
Even though deception does not provide an investor the right to cancel a subscription agreement, shareholders are in a good position to pursue directors who have deceived them. For example, as shareholders, they have a variety of rights to guarantee that the company’s directors do not act in an unjust manner against them.
What if I owe money to a dissolved company?
Any outstanding obligations must be reimbursed when a limited company is dissolved, whether through Members’ Voluntary Liquidation (MVL) or voluntary strike-off. A licensed insolvency practitioner (IP) oversees Members’ Voluntary Liquidation and guarantees that creditors are paid in full.
However, company dissolution is carried out by the business’s directors, who may be unaware that the firm can be revived if debts remain. Creditors must be notified of the company’s intention to be struck off so that they can protest if required, and it is the directors’ responsibility to ensure that all creditors are contacted.
Is the company solvent?
When thinking about dissolving and closing down a firm, the first thing to consider is its solvency; if it isn’t, directors must contemplate an insolvent liquidation. When a corporation is subject to a Members’ Voluntary Liquidation and it has debts, the liquidator will sell the firm’s assets to pay creditors and then distribute any remaining funds to shareholders.
Directors must first sign a Declaration of Solvency, stating that the company can repay its debts within a year. If the board of directors decides to dissolve the company themselves, they must disperse the assets, bring the company’s tax position up to date, affirm the ability to pay any debts, and shut down the business within three months.
What if debts still exist?
Even when the board of directors has made a formal statement that the firm was solvent when it was dissolved, debts can still persist. Regardless of whether this is done on purpose or not, the creditor(s) concerned will almost certainly attempt to have the firm reinstated in the register.
As a result, directors risk being accused of misbehavior because they are supposed to be aware of their company’s financial situation at all times. The company may then have to go through an insolvency process known as Creditors’ Voluntary Liquidation (CVL).
How to close down a company with debts
Creditors’ Voluntary Liquidation is the proper approach to close down a company that owes money to creditors. A CVL prioritizes the interests of individuals who owe money and guarantees that they obtain the best possible return under the circumstances. If the directors are also employees of the limited company, they may be able to claim redundancy pay if they go this path.
It is not a good idea for directors to dissolve a firm with debts through voluntary strike-off. In practice, Companies House is unlikely to grant a strike-off application if debts still exist; the strike-off application is publicly publicized, which means creditors can examine it and complain.
Can you take over a dissolved company name?
Firms that have been struck off the register and are no longer in existence are known as dissolved companies. This means that the name of a defunct corporation can be registered by a new or existing corporation.
Apart from the regular company name laws and regulations set out in the Companies Act 2006 and supplementary legislation, there are no legal limits in place to ban the use of these names.
Research the dissolved company
If you’re thinking about using a dissolved company name, do some research on the company that used to trade under that name. It’s critical to learn about the dissolved company’s reputation because it could have a significant impact on your own company’s image.
While your company will be given a separate company registration number (CRN) and will have no legal ties to the dissolved company, prior customers and creditors may be confused. If the company provided poor customer service, had negative press, or had outstanding liabilities at the time of its liquidation, this might be a problem.
Who is liable for company debts?
That is to say, the company and its owners/shareholders are treated as a single legal entity. The company’s finances and its stockholders are seen as one and the same. As a result, the shareholders are legally liable for the company’s debts.
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.
