Implications of insolvency for the limited company

Q. My business operates through a limited company and I believe that if the company becomes insolvent then I am not personally responsible for the debts of the company. Is this the case?

A. Historically that would be the situation but in the last 2 to 3 years promoters of limited companies are finding that with the increase in insolvencies this limited liability status is eroding.

There can now be personal exposure in a number of ways:

  1. A risk of personal liability attaching to the directors can arise if proper books of account are not kept  by the company
  2. The use of debtor receipts to reduce overdrafts which are personally guaranteed could lead to an allegation of fraudulent preference
  3. Personal guarantees given by Directors in the “good times” for bank borrowings to key suppliers, leasing companies and landlords for example are pursued.
  4. Loans taken personally by promoters for investment in companies which are now experiencing trading difficulties.
  5. Certain legislation introduced by Revenue in the last 5 years gives them extensive powers to pursue directors personally for PAYE outstanding which was deducted from employees but not paid by Revenue.
  6. If in advance of a liquidation PAYE is paid to Revenue with a view to reducing exposure mentioned above this could be deemed to be a fraudulent preferential payment which could in turn lead to the directors having to pay the Revenue personally and face restriction from a liquidator.

Great care is needed in dealing with an insolvent company as there could be serious implications for the Directors for quite some time after its liquidation.

For further information, contact Jimmy Dolan Partner, OSK

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