Promises, promises… Directors of struggling businesses need to be careful what they say

There is a tendency for directors of struggling businesses to delay taking advice, in the hope that ‘something will happen’. But if debts are building up, directors need to take care that they do not do or say anything that could lead to them being made personally liable for the debts of their company.

There are a number of advantages to running a limited liability company (a ‘Ltd’ company) and as a result they are extremely common business entities. The term ‘limited liability’ means that the ‘members’ or shareholders of the company have only limited liability for the debts of the company: their exposure is limited to the amount which is owed for their shares. The shareholders – who are often also the directors in small companies – do not risk their personal assets if the company goes bust. However, there are some instances where directors can be made personally liable for the debts of their company.

In general, directors have a ‘fiduciary duty’ towards the company: in other words, they are obliged to act in good faith and in the best interests of the company at all times. A limited company is a separate legal entity from the shareholders and directors, but it relies on the directors to deal with the proper management of the company. Therefore, the directors are responsible for the way in which the company is run and may be held accountable if things go wrong – especially if creditors lose out. So whilst it may be tempting to put a brave face on things and keep making promises to creditors, care must be taken if the reality is that the debts are never likely to be repaid.

In a recent case, two company directors were held to be personally liable for some of the debts of their company, where they had told a creditor that a debt would be paid. As a result, the creditor decided not to repossess goods under a ‘retention of title’ clause and also held off taking legal proceedings against the company. The court decided that the representations that the debt would be paid in future had been false and ‘reckless’ – suggesting that the debt would be paid when in reality it was likely that the debt would not be paid. As a result, the creditor had lost out and the directors were made personally liable for the debt.

Many directors are naturally optimistic and ‘hope for the best’ – and things often turn out alright. But where serious financial problems occur, it is vital to take advice about the options, rather than making promises to creditors that can’t be kept.

To find out all the options, call Paul Moorhead at Moorhead Savage today on 01709 331300.