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Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Directors face civil and criminal liability if they fail to file for insolvency within three weeks from the company becoming illiquid or over-indebted. If the directors fail to file for insolvency within this timeframe, they are personally liable for any non-justified payments which they made after the company became illiquid or over-indebted (ie, insolvent trading). They are further liable for damages suffered by creditors that contracted with the company after it became illiquid or over-indebted and subsequently encountered losses.
Directors face further liability if they have conducted any criminal offences in connection with the insolvency (eg, fraud, bankruptcy or violation of bookkeeping duties).
Shareholders may face liability in connection with the company’s insolvency if:
- they have withdrawn assets from the company;
- the withdrawn assets were vital for the company’s existence;
- the withdrawal was made for non-operational reasons; and
- the withdrawal caused or deepened the company’s insolvency.
Further, if the company has no directors, the shareholders must file for insolvency no later than three weeks after the company has become illiquid or over-indebted.
What defences are available to a liable director or parent company?
The biggest liability threat for a director results from insolvent trading. Directors may claim in their defence that:
- the company was not illiquid or over-indebted;
- they were not and could not have been aware of its illiquidity or over-indebtedness; and
- the payments were made with the care of a prudent businessperson.
This applies only where certain preconditions are met and legal advice should be obtained in each case.
The burden of proof for delayed filing and payments made lies with the insolvency administrator. The directors carry the burden of proof that any payment was made with the care of a prudent businessperson.
To the extent that a shareholder is held liable for a delayed filing for insolvency, the shareholder may show that:
- the company had a managing director;
- the filing was not delayed; or
- the company’s illiquidity or over-indebtedness had not been recognisable, even if the necessary care was applied.
What due diligence should be conducted to limit liability?
Directors should always ensure that they are sufficiently informed about their company's financial situation. If a company enters into a financial or operational crisis, directors' duties to monitor the company's finances (particularly its liquidity) include an obligation to closely monitor the company's finances. In order to prove that they have diligently monitored the company’s finances and that the company was not illiquid or over-indebted at a certain time, directors should keep records that sufficiently show that they acted with the care of a prudent businessperson. Directors should obtain legal advice to show that they acted with the necessary diligence.
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