WHEN a company becomes insolvent, is potentially insolvent or is on the verge of insolvency, there are important issues of which the company director(s) need to be aware because there can be personal implications for them in these circumstances.

The first of the five most significant things they need to know, whether the company is insolvent or not, is that directors must ensure they do not breach their statutory duties. There are seven duties under the Companies Act 2006 but, in general terms, directors are bound to act in the best interests of their company at all times and must always use reasonable care and skill as a director.

If a director breaches their statutory duty an interested party can bring a claim against the director personally. If the claim is successful, the director may be ordered to pay back into the company any loss it has suffered as a result of their failure to comply.

The remaining four points apply to directors of companies that are insolvent and where a liquidator has been appointed under the Insolvency Act 1986.

A director may face action for wrongful trading if the company continued to trade when the director either knew, or should have known, the company could not avoid being liquidated.

In this case, an application can be made by the liquidator for the director to personally pay a sum of money to the company to compensate creditors.

Directors can also face action for fraudulent trading where they either knew, or should have known, that the company could not avoid being liquidated.

In addition, trading fraudulently is a criminal offence that carries a prison sentence.

Directors sometimes also give personal guarantees on company borrowings such as loans or overdrafts. If a company is liquidated, or goes into another form of insolvency, and creditors are unable to get their money back, then the personal guarantees may well be enforced against the director personally.

Finally, under the Company Directors Disqualification Act 1986, the court has a wide range of powers to disqualify directors of insolvent companies who have wrongfully or fraudulently traded from acting as a director for two to 15 years. It is also a criminal offence.

Directors are advised to seek legal advice from an insolvency specialist.

■ Paul Monaghan is a solicitor with BHP Law. Contact him on 0191-221-0898.