In the past there was little risk that a director would face personal liability. However with the passing of the Insolvency Act 1986, the Company Directors Disqualification Act 1986 and, more recently, The Companies Act 2006 the risk is considerably grea

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Laura Dunlop

200600847

Commercial Law 2 Coursework

Word Count: 2,061

In the past there was little risk that a director would face personal liability.  However with the passing of the Insolvency Act 1986, the Company Directors Disqualification Act 1986 and, more recently, The Companies Act 2006 the risk is considerably greater if a company becomes insolvent.

Critically discuss the above statement with reference to these statutes and to case law as appropriate.  

Director’s duties and responsibilities have dramatically increased with the introduction and recent reformation of legislation on insolvency, director’s disqualification and companies, to the extent that they can face personal liability. Case law and statutes have shown that directors are becoming increasingly at risk from being held personally liable for a company’s insolvency.  This is evident from provisions in the Insolvency Act 1986, the Company Directors Disqualification Act 1986 and the Companies Act 2006.

The Insolvency Act 1986 is the primary legislation relating to corporate insolvency and the winding up of companies.  Part IV covers the winding up of companies registered under the Companies Acts and Section 75 concerns ‘Directors, etc. with unlimited liability’.  It provides that in the winding up of a limited company, a director (past or present) “…is liable to contribute as an ordinary member, to make a further contribution as if he were at the commencement of the winding up a member of an unlimited company.” Exempt from this are past directors who have ceased to hold office for a year or more before the commencement of the winding up and they are not liable to make contributions in respect of any debt or liability of the company contracted after they ceased to hold office. Therefore, directors are personally liable to contribute as ordinary members and to make a further contribution as if they were at the commencement of the winding up a member of an unlimited company. 

Directors are also answerable to a court if a liquidator applies to the court for a public examination of the company’s officers.  This includes anyone who “has been concerned, or has taken part, in the promotion, formation or management of the company”, liquidators, or receivers of its property, past or present.  Section 133(3) states:

“…the court shall direct that a public examination of the person to whom the application relates shall be…publicly examined as to the promotion, formation or management of the company or as to the conduct of its business and affairs, or his conduct or dealings in relation to the company.”

Section 134 continues with the enforcement of this, as, a person who without reasonable excuse fails to attend his public examination is guilty of contempt of court and liable to be punished accordingly, and if there are grounds for believing that a person has absconded, with a view to avoiding or delaying his examination, the court may issue a warrant for that persons arrest or for him to be held in custody, and for the seizure of any books, papers, records, money or goods in that person's possession. This is an example of the extent to which directors are at risk of becoming personally liable for a company if it becomes insolvent. This section in the Insolvency Act 1986 highlights one of the ways in which the courts are attempting to catch out corrupt directors who have acted fraudulently themselves or been dishonest and tried to conceal company activities, as liquidators who suspect anything malevolent must apply to the court for a public examination of the company’s officers.  

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Interestingly, a director or shadow director of a company which has gone into insolvent liquidation can be personally liable for debts of any other company with a confusingly similar name which he runs within five years after liquidation of the first company. This is another example of the possible extent to which directors can be held personally liable by courts if their company becomes insolvent.

Sections 213-214 of the Insolvency Act 1986 focus on directors’ behaviour in fraudulent and wrongful trading.  If, during the winding up of the company it appears that any business has been carried on with intent ...

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