For many directors, the biggest benefit that comes from working within a company is that you aren’t saddled with the burden of personal responsibility for the company’s debts. There aren’t as many risks when working within a company when compared to working on your own. However, this shouldn’t leave you feeling untouchable. There are certain circumstances that can leave the director personally responsible for the debts of the company. Principle Insolvency is here to talk about the personal responsibility of directors and company debts.
The Limits to Limited Liability
While there are few liabilities for a director when it comes to the debts of the company that they work for, there are limits to this. This happens because the company takes on the debts under the company name and the director doesn’t have to worry about personal risk. However, when directors breach their responsibilities, everything can change. Here are some situations where directors can be held personally responsible
– Reckless Trading: When directors sign on with a company, they are agreeing to section 135 of the Companies Act 1993 which states that directors will not act in any way that will put the company at a significant risk. For instance, if you are trading and you know that the company can’t pay the debts, and the creditors experience a loss as a result, you could be held personally liable for the losses that incurred.
– Illegal Trading: If a director is trading when they are aware that the company is under financial distress, it’s a problem for the director. Under section 136 of Companies Act 1993, it clearly states that directors cannot trade when they are aware that the company can’t perform and carry out the obligation. This can lead to both personal liability as well as criminal consequences.
– Failing to Keep Accounting Records: The obligation of keeping accounting records falls to the director. If something happens, and the company goes into insolvency or liquidation and there aren’t any proper records that have been kept, the direct will be held responsible.
– Insolvent Transactions: A director can’t make any transactions when the company is insolvent. This includes things like payments to creditors, asset transfers, and security interests granted within two years of liquidation. In the case that assets were moved out of the company that preferred certain creditors over others, those transactions will be reversed, and the money will be taken back.
– Personal Guarantees: Directors may sign personal guarantees to creditors including banks, landlords, major suppliers, and even financial companies. If you have signed a personal guarantee, you are personally responsible.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If your company is in trouble, and you aren’t sure what the next step is, you can turn to Principle Insolvency to help guide you through the process. We will make sure you clearly know what to expect from the process. We are in this to help you successfully navigate these uncharted waters. Call us today!