08: Responsibility under insolvency legislation
The Insolvency Act 1986 provides that directors may become personally liable for an insolvent company’s debts when:
- Wrongful trading has occurred, ie a director has allowed the company to continue trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. What directors should have known and done depends on the knowledge, skill and experience they have or might be expected to have. Wrongful trading is a serious hazard for the inexperienced, well intentioned director, particularly if they are poorly informed about the company’s financial health or unaware of the warning signs.
- There has been misfeasance (wrong doing) and/or a breach of common law or statutory duties
- The company was unable to pay its debts as they fell due.
- The directors did not take every step possible to minimise creditors’ losses.
- Fraudulent trading has taken place, ie trading with the intent of defrauding creditors.
These rules catch not only rogue traders but also people who try to trade their way out of hopeless financial situations.
