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Director and parent company liability
Liability Under what circumstances can a director or parent company be held liable for a company’s insolvency?
A director is a fiduciary of the company. Accordingly, if he or she breaches that duty and causes loss to the company such that it becomes insolvent, he or she may be personally liable for damages to the insolvent company if the liquidator successfully brings a claim.
In the Cayman Islands, a director is not exposed to personal liability merely because a company trades when insolvent. However, under Section 147 of the Companies Law, a director can be declared to be liable to “make such contributions, if any, to the company’s assets as the Court thinks proper” if it is found during the winding up that the company’s business was carried out with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose.
A parent company, like any other person, might be liable in respect of a voidable transfer that is in fact voided on the application of the liquidator, such as:
- a disposition made at an undervalue with intent to defraud creditors (under Section 146(2) of the Companies Law); or
- a voidable preference.
In relation to voidable preferences, the parent company is likely to be deemed to have been preferred as a related party.
Defences What defences are available to a liable director or parent company?
Directors may be expressly indemnified by the company under its articles of association in respect of claims arising out of their acts or omissions, save that it is impossible to exclude liability for fraud, dishonesty or wilful default.
Due diligence What due diligence should be conducted to limit liability?
Directors should carefully and regularly monitor the cash-flow and balance-sheet solvency of their companies and should seek advice from lawyers and other professional advisers as appropriate. They should maintain appropriate directors' and officers' liability insurance cover and seek wide indemnities under the company’s articles of association.
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