Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

Restructuring & Insolvency

Hungary Small Flag Hungary

Civil liability
As a general rule under the Insolvency Act, any person with the power to influence the decision-making mechanism of the company will also be considered as executive of the company, meaning that he / she could be held liable on the same ground as an executive (liability of shadow directors) (please refer to Question 11).

Liability of dominant members of corporate groups
In case of groups of corporations, if any controlled member of the group is undergoing liquidation, the dominant member is to be held liable for any debt the member may have outstanding (please refer to Question 16). However, the dominant member may be relieved of liability if able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.

Veil piercing rules in liquidation proceedings
In respect of the liquidation of a company under control by a qualified majority (75%), a sole member company or a sole proprietorship, the controlling party or the sole member (shareholder) is responsible, without limitation, for the company’s liabilities not covered by the debtor’s assets during the liquidation proceedings. However, the court must establish the unlimited and full responsibility of such controlling party or member (shareholder) for the company’s liabilities pursuant to a claim filed by the creditor during the liquidation proceedings or within a 90-day limitation period following the final conclusion of liquidation proceedings, on account of such controlling party or member (shareholder) having had a history of making unfavourable business decisions from the standpoint of the debtor company.

Liability for transfer of shares done in bad faith
If, according to the interim financial statement approved by the court (or the proposal for the distribution of assets approved by the court in simplified liquidation proceedings), the debtor has accumulated debts in excess of 50% of its equity, upon the request lodged by a creditor (within a 90-day limitation period following the opening date of the liquidation procedure) the court is bound to establish that a former member (shareholder) with majority control (50%), who transferred his share within three years before the opening date of the liquidation procedure, is subject to unlimited liability for the debtor’s outstanding liabilities. The former member transferring his share may be relieved of liability, if he is able to prove that the debtor was solvent at the time of transferring such share, and that threat of insolvency or insolvency occurred subsequently, or that he has acted in good faith bearing the interests of creditors in mind in transferring his share, even though the debtor was in a situation considered to carry potential danger of insolvency, or was insolvent. The liquidator shall inform the creditors’ select committee, the creditors’ representative or the registered creditors seeking information concerning such transfers of shares underlying the liability of the former member (shareholder).

Italy Small Flag Italy

Directors, shareholders and parent entities of a joint stock company or a limited liability company cannot be held liable for the insolvent debtor's debts (with limited exceptions). Their liability arises only for damage caused to the company or to third parties (including creditors) owing to breach of fiduciary duties or wrongful conduct.

Only members of partnerships can be held liable for the debts incurred by the insolvent partnership. They are also declared bankrupt if the partnership is declared bankrupt.

A parent entity (that exercises a systematic and continuous influence and co-ordination on the overall management of another company) can be held liable to minority shareholders (if any) and creditors of the influenced company whenever its influence causes a breach of the principles of fair and correct management of the influenced company, resulting in: (i) a decrease in the value of its shares or (ii) a prejudice to the company's equity to the detriment of creditors. Liability is not triggered if the directing entity can prove that overall any damage to the influenced company has been offset by other benefits arising from opportunities or other particular courses of action taken by the directing entity.

Lenders are exposed to the risk of tort liability for fraudulent or imprudent extension of credit to an insolvent debtor when the lender knew, or ought to have known, that the debtor was insolvent or was likely to become insolvent. When lenders are found to be liable, the extent of the liability covers the losses suffered by individual creditors owing to the delay in the commencement of insolvency proceedings and damages suffered by new creditors who have relied on the debtor’s apparent creditworthiness as the basis for extending credit.

Spain Small Flag Spain

When any such categorisation is carried out as a result of the commencement of the liquidation phase, the court may also order the directors or liquidators, whether de iure or de facto, the attorneys with general powers (including those who held such offices in the two years preceding the date of declaration of insolvency) and the shareholders that have refused, with no reasonable cause, to the capitalisation of credits or the issuance of convertible instruments established in a refinancing agreement, to cover all or a part of the deficit of the insolvency proceeding.

The concept of de facto director is based, according to the most recent case law, on three fundamental pillars, namely:

  • Habitual or continuous discharge of that duty (excluding one-off intervention), an effective and real presence in the corporate management area being necessary;
  • Autonomy, which involves the independent exercise of management powers, without following instructions or being subject to the approval or direction of another person; and
  • A certain quality in the discharge of such duties, those whose action remains in the area prior to the decision being excluded. In other words, the action must be of importance.

As referred, it should be highlighted that shareholders can be affected by the categorisation of an insolvency procedure as guilty. Act 17/2014 (previously Royal Decree-law 4/2014) added a new section 4 to article 165 of the Spanish Insolvency Act establishing a further iuris tantum assumption of culpability for any director or shareholder who denies any capitalization of credits or the issuance of convertible securities without any reason, blocking the achievement of a refinancing agreement.

The aim of this new event of liability could be encouraging the directors and even the shareholders of any company to avoid a petition for insolvency proceedings while there is still a reasonable possibility of paying off the creditors.

Japan Small Flag Japan

Under Japanese law, parties other than the debtor are not liable for the debts of an insolvent debtor except under limited circumstances where, for example, they have expressly guaranteed such debts.

Denmark Small Flag Denmark

The executive board and shareholders may incur liability if decisions made results in losses for the company or a third party. The executive must have acted intentionally or negligently in order to incur liability for the loss that the decisions have caused the company or a third party.

The assessment of liability is more severe in case of shareholders as the share-holder must have acted with gross negligence in order for him to incur liability for the loss that the company, other shareholders or a third party has suffered. This is consequently an exception to the rule that as a starting point the share-holder cannot incur liability.

Australia Small Flag Australia

As described previously, directors can be liable for the debts incurred by a company that is cash flow insolvent or where the director has reasonable grounds for suspecting that it is likely to become cash flow insolvent.

The Corporations Act also provides that holding companies can liable for the debts of the insolvent subsidiaries in circumstances where the parent failed to prevent the insolvent trading of the subsidiary, so long as the parent had reasonable grounds to suspect that the subsidiary was insolvent.

Cayman Islands Small Flag Cayman Islands

If a director or third party has provided a guarantee to a creditor in respect of a company's debts, that guarantee may be capable of enforcement against such director or third party guarantor personally.

Directors may also be personally liable for the company's debts if they breach their fiduciary duties in certain circumstances. In addition, if it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose, a liquidator may apply to the Court for an order that such persons make a contribution to the company's assets.

As a separate legal entity, a parent company will not usually be liable for its subsidiary's debts. However, in certain circumstances, the Court may lift the corporate veil to make a parent company liable if it can be demonstrated that:

  1. Some impropriety has occurred and the incorporation of the subsidiary company is a façade designed to conceal or avoid liability on the part of the parent company; or
  2. The parent company is exercising control over the subsidiary, such that the subsidiary is effectively acting as its agent.

Switzerland Small Flag Switzerland

Executive bodies of a Swiss corporate may become liable for certain social security contributions and withholding tax obligations which were not paid prior to the initiation of insolvency proceedings. Furthermore, the parent company of an insolvent corporate debtor may become liable for claims of creditors of the latter in exceptional circumstances, namely under the theories of piercing the corporate veil and/or based on a trust based liability. Requirements established in court precedents and legal doctrine are fairly strict, though.

Partners and lenders are not typically exposed to the risk of incurring a liability for the debts of an insolvent debtor unless they have assumed the role of a de facto shadow executive of a Swiss corporate in which case they may become exposed to the risk of director's liability (see section 11 above). That said, recent court precedents hold that it is generally not sufficient to be qualified as a shadow director where a contracting party or lender merely acts to protect its contractual position.

While they do not directly incur a liability for the debts of an insolvent debtor, the company's statutory auditors may become liable for damages similar to a company's director if they do not notify the court if the company is over-indebted and the board of directors fails to notify the court itself (see section 11 above).

Germany Small Flag Germany

Absent any

  • guarantee,
  • contractual assumption of liability or
  • profit and loss transfer and/or domination agreement,

other parties are, in principle, not liable for the debts of a company with limited liability.

The shareholders may become liable for the debts of a limited liability company if they commingle the assets of their company with their own (‘piercing the corporate veil’).

The German Federal Court has developed a liability of the shareholders towards their company for ‘exterminating interventions’ (existenzvernichtender Eingriff), ie acts of the shareholders depriving the company of the assets it needs for remaining a going concern, so that sooner or later it will become insolvent.

Mexico Small Flag Mexico

Except for guarantors, joint obligors, co-borrowers, or similar parties, third parties are not liable for the Recognized Claims of an insolvent entity. Partners’ and shareholders’ are generally limited to the value of their equity contributions.

British Virgin Islands Small Flag British Virgin Islands

Other than claims against directors and other officers in respect of misfeasance, fraudulent trading, or insolvent trading, or other general grounds on which personal liability may be incurred, such as assisting in a breach of fiduciary duty or fraud, there are no routes by which other parties connected to the liquidation of a company may be liable for the debts of an insolvent debtor. In relation to misfeasance, fraudulent trading, and insolvent trading, it should be noted that the liability is to the company to make good losses that have been suffered, and not to provide any third party with an additional person against whom they may seek a remedy.

At present, there is no regime applicable to insolvent partnerships, though the bankruptcy of a partner will trigger the dissolution of the partnership, in the absence of agreement to the contrary. The court has jurisdiction to order the dissolution of a partnership where its business can only be carried on at a loss, but only the partners can apply for such an order, and creditors have no recourse. There is no specific regime relating to voidable transactions (though section 81 of the Conveyancing Act remains available). If the partnership is a limited partnership, only the general partner may be sued personally, and commonly limited liability companies are used as sole general partners, effectively removing the risk of personal liability for partnership debts.

Only if there is a specific contractual provision will parent or group companies become liable for the debts of a related company, unless it is possible to pierce the corporate veil and identify the parent with the subsidiary.

Bermuda Small Flag Bermuda

Each partner is jointly liable with the other partners for all debts and obligations of the firm incurred while he is a partner. Execution will not issue against partnership property except on a judgment against the partnership firm.

Parent entities
Absent any contractual obligation such as a guarantee or a parent company being complicit in the wrongdoings of a subsidiary, a parent company will not be held liable for an insolvent subsidiary company's debts except for situations where creditors can pierce the corporate veil.

Other parties
A third party can be held liable for the debts of an insolvent company if that person has taken part in the management of the company in circumstances that amount to fraudulent trading, even if that person is not a director. A person who has knowingly assisted a director to commit a breach of his fiduciary duties or other wrongdoing to the company can be held liable for the loss to the company subject to any lawful indemnity afforded to the director.

Greece Small Flag Greece

The liability of non-timely filing of bankruptcy lies primarily with the directors of the company (i.e. the members of the board and the officers). Greek bankruptcy law provides for third parties to be held liable only insofar as those persons were in a position to significantly influence and impose on the directors of the company the decision not to file, or to delay filing for bankruptcy . Such liability exists only if the company was subsequently declared bankrupt.

The concept of “abusive support” is still not recognised by Greek law, although one can argue that financing a company facing financial difficulties may create a liability for the financing party if such financing is granted to a company that ought to have already filed for bankruptcy (i.e. it is in a status of cessation of payments) and was granted with the intention to delay such filing, reducing the assets of the company by increasing its liabilities to the detriment of the then existing creditors or creating a false impression of solvency of the company to third parties.

Although there is no case law, the legal theory is clear that the person that supports financially a bankrupt company can be found be liable if (a) it had actual knowledge that the company was in a bankruptcy situation, (b) financing was provided with the intention to instigate a non-timely submission of bankruptcy to the detriment of the creditors and/or create a false impression of solvency to third parties.

Not granting financing to a company facing financial difficulties might theoretically trigger a liability in the case (a) where the party denying such financing acts abusively or against moral ethics and (b) such abusive or immoral behaviour resulted into the bankruptcy of the company to the detriment of the company and its creditors.

Such claim can be brought on the basis of the tort provisions of the Greek Civil Code either by the company (in which case it will be based on an abusive behaviour) or by any third party (in which case it will be based on an immoral behaviour and requires that the third party proves that it has directly suffered damages).

Singapore Small Flag Singapore

Directors may be liable for contracting a debt knowing that there was no reasonable prospect or probable grounds of expectation that the company would be able to pay the debt. Please refer to the discussion above.

United Kingdom Small Flag United Kingdom

Directors may be exposed to personal liability through wrongful trading, as set out above. Liability may extend to third parties in certain limited circumstances.

Firstly, the TUPE regulations may apply when assets are purchased out of an administration: where the business is being carried on is substantially the same as before, all liabilities of employment transfer to the purchaser. This will include redundancy costs and unfair dismissal claims.

Further, the Pensions Regulator has moral hazard powers it can exercise when a connected third party has acted in a way that has been materially detrimental to a defined benefit pension scheme of the debtor. The Regulator can issue a contribution notice against employers and their connected persons where relevant, demanding payment to remedy any shortfall in the scheme.

Finally, the European Commission and the Competition and Markets Authority have the power to reach behind the corporate veil when fines they have issued are left unpaid by an insolvent debtor and where there is a structural link with an economic successor entity.

Indonesia Small Flag Indonesia

In principle, no third party can be held liable for the debts of the bankrupt debtor. However, in addition to the BOD, the members of the Board of Commissioners (“BOC”) may also be held liable jointly together with the BOD, if the bankruptcy is due to their fault or negligence in supervising the company’s BOD and the bankruptcy estate is not sufficient to settle all of the company’s debts.

Further, in general, the liability of shareholders is limited to their shareholding. However, a shareholder may be held personally liable for its actions or for the losses incurred by the company if any of the following applies:

  • the company has not yet obtained a legal entity status;
  • the shareholder has used the company in bad faith solely for its own benefit;
  • the shareholder was involved in unlawful acts committed by the company;
  • the shareholder used the assets of the company in a way that caused the company to be unable to settle its debts;
  • the company has had only one shareholder for more than six months.

France Small Flag France

Under French law, the concept of shadow directorship or de facto mangers (gestion de fait) targets any person who interferes or has interfered with the management decisions of the company and which has contributed to an inefficiency of assets. Creditors, but also shareholders or more generally anyone, can become a shadow director. A de facto manger has the same responsibilities as a de jure manager of the company.

In limited cases, creditors may also incur liabilities for abusive support in cases of fraud, indisputable interference in the management of the debtor or if the guarantees obtained for the loans or credits are disproportionate.

Israel Small Flag Israel

There are several circumstances in which a third party can be held liable for the debts of an insolvent company.

Piercing the corporate veil
The general rule is that a company has a legal personality, separate from its shareholders. However, the court can pierce the corporate veil, in which case the company's debts are attributed directly to one or more of its shareholders, and creditors can collect directly from these shareholders rather than from the company. The court will pierce the corporate veil if the shareholders abused the company's separate legal personality. This might happen, for example, if the shareholders defrauded a person, unlawfully favored certain creditors over others, or acted such as to undermine the purposes of the company, while assuming unreasonable risks with respect to the company's ability to repay its debts (Article 6, Companies Law).

If the company is being liquidated:

  • If officers of the company are shown to have managed the company with an intent to deceive (Article 373, Companies Ordinance), they can be held liable. There is no need to prove causation between the deceitful act and the company's liquidation.
  • If officers of the company unlawfully used the company's money or assets, the court can require them to return this money or assets together with interest fixed by the court, or pay compensation (Article 374, Companies Ordinance).

Civil wrongs
In case of a financially distressed company, personal liability may also be imposed on its officers pursuant to the civil wrong of negligence, based on the officer's fiduciary duty and duty of care. (Torts Ordinance (New Version) 1968).

To file a tortious claim against a company officer, the plaintiff must prove that:

  • The officer owed a duty of care to the plaintiff (in addition to his duty of care toward the company);
  • This duty was breached;
  • The breach of this duty caused damage to the plaintiff (regardless of any damage caused to the company);
  • A reasonable person would have anticipated that the breach would cause the damage to accrue.

If an executive or shareholder of the company acts fraudulently toward any of the company's creditors, he/she can be charged with fraud or deception and be liable in tort.

The Netherlands Small Flag The Netherlands

The main rule under Dutch law is that a shareholder of a company is not personally liable for the obligations of the company since the company has legal personality. However, a shareholder can under exceptional circumstances be held liable on the basis of for instance tort (e.g. in the event a shareholder commits a tort with regard to creditors by infringing a duty of care).

A party (such as a controlling shareholder) who has acted as de facto director, could be held liable on the same grounds as a managing director.

Lender liability is relatively rare but cannot be excluded depending on the circumstances.

We refer to question 11 as regards director liability.

Luxembourg Small Flag Luxembourg

In addition to the general grounds of civil liability for breach of fiduciary duties, a director can be held liable for the company's debts. Legal and de facto directors/managers of a bankrupt company can be held personally liable for the company's outstanding debts if the bankruptcy results from serious and blatant faults for which they are accountable, such as entering into transactions completely out of proportion to the company's financial capabilities and which lead to its bankruptcy. Such claims can only be brought by the company's bankruptcy receiver(s) within three years following the court judgment establishing all outstanding receivables.

The parent entity (domestic or foreign) of a commercial company can be held liable to fully pay-up shares which it has subscribed for. It can also be exposed to liability if it has acted as a de facto manager or if the creditors can successfully demonstrate that the parent entity and the bankrupt company should be considered as one and the same party, in particular because of a co-mingling of assets.

Subsidiaries of a bankrupt group company might also bear exceptional or additional liabilities where the court considers that the group company would bear excessive risks disproportionate to its net assets and financial position and takes the view that such company would never have taken such risk as a fully independent entity. For such additional liabilities to be incurred by the subsidiaries it would have to be shown that those subsidiaries were compensated by present or future financial benefits.

A bankruptcy receiver can seek general tort damages from certain third parties that committed a fault that lead to the bankruptcy or damage to the bankruptcy estate. Courts have recognised the validity of such actions against banks, accountants and auditors. A bank can, for instance, be held liable where it has misleadingly maintained the appearance of solvency of the debtor or where it has abruptly rescinded a credit facility.

Belgium Small Flag Belgium

Shareholders: Shareholders of limited liability companies are only held liable for the specific contribution they have undertaken to make (exception: shadow directors or on the basis of tort). If the debtor is an NV/SA (public limited liability company) and all shares are held by a single shareholder for a period that exceeds one year, the shareholder is deemed to guarantee all obligations of the debtor.

Founders: Founders can be held liable if the debtor becomes bankrupt within three years following its incorporation, and if the debtor’s capital on incorporation was manifestly insufficient for the normal conduct of the intended business activity over at least a two-year period.

Lenders liability: A lender may be held liable if by granting or maintaining a loan it created a wrongful appearance of solvency of the debtor, which incentivised third parties to contract with the insolvent debtor (criterion: a normal, prudent and reasonable lender, placed in the same circumstances). Untimely/abruptly withdrawing a loan may also lead to liability.

Argentina Small Flag Argentina

No other third parties incur in liability for the debts of an insolvent debtor with the exception of what was mentioned in the previous question and also in special situations where bankruptcy might be extended in certain cases.

The Bankruptcy Law establishes that bankruptcy shall be extended to: (i) any person that acting as if it were the debtor, performed acts on their own benefit, damaging the creditors´ rights, (ii) a controlling person who performed acts on their own benefit through the controlled company and (iii) any person when there is a commingling of assets and debts between the debtor and that person and that prevents understanding who owns each asset.

United States Small Flag United States

Generally, directors, partners and shareholders, including parent companies, will not be held liable for the liabilities of a corporation unless a court disregards the corporate form under the doctrine of “piercing the corporate veil.” Despite different formulations, courts generally analyze two considerations in determining whether the corporate veil should be pierced: (a) whether there was a fraud or injustice perpetuated in the use of the corporate form and (b) whether the corporation has been so dominated by an individual or corporate parent that the subsidiary is relegated to the status of a mere shell, instrumentality or alter ego. With respect to whether a corporation is a mere shell, instrumentality or alter ego, courts will generally look to the following factors: (a) failure to observe corporate formalities; (b) undercapitalization; (c) intermingling of corporate funds; (d) overlap in corporate officers, directors and personnel; (e) common office space, address and telephone numbers; (f) the amount of business discretion exercised by the subsidiary corporation; (g) whether the two companies deal with each other at arm’s length; (h) whether the corporations exist as independent sources of profit; (i) the guarantee of the subsidiary’s debts by the parent; and/or (j) common use of corporate property. These factors are not exhaustive, and the presence of one or more factors does not mandate veil piercing.

Directors may be held liable under federal and state laws for failure to ensure payment of certain trust fund taxes, such as payroll taxes. In particular, a corporation is required to remit any withheld taxes from an employee’s paycheck directly to the government. Misuse of these funds or failure to remit can lead to personal liability for any person responsible for such misuse or failure to remit.

Typically, no fiduciary duty arises out of the contractual arms’ length debtor-creditor relationship. However, there are still a number of theories by which a lender could be found liable for damages to the debtor, have its debt claims equitably subordinated or recharacterized or have its claims avoided. These scenarios usually arise when a lender exerts excessive control over a debtor’s finances and operations. A lender is said to exercise dominion and control when it exerts sufficient authority over the debtor so as to dictate corporate policy and the disposition of assets.

Poland Small Flag Poland

The management board members have joint and several liability with the company for the payment of the company’s liabilities and tax arrears, as briefly described in the response to question no. 3 above.

Also, partners in a partnership (except for shareholders in a limited joint-stock partnership) may be held liable for the partnership’s liabilities if enforcement proceedings against the partnership prove ineffective.

Apart from the above situations, generally there is no piercing of the corporate veil in Poland.

Ireland Small Flag Ireland

Directors’ liability
As explained in more detail in our response to Question 11 above, a director of an insolvent can become personally liable for personally liable (without limitation of liability) for all or any part of the debts or other liabilities of the company where he or she is found to have (a) knowingly engaged in reckless trading (b) engaged in fraudulent trading or (c) failed to ensure that the company keeps adequate records.

Where a party (including a lender, parent entity or other party) is found to be a shadow director of an insolvent company (i.e. a person in accordance with whose instructions the company was accustomed to act), then it could also be treated as a director and become personally liable in the circumstances outlined above.

Related companies
Liquidators, creditors and contributories of a company that is being wound up have the power to apply to court to have related companies contribute to the debts and liabilities of the company which is being wound up by means of a contribution order. In any such application the Court will have regard to (a) the extent to which the related company took part in the management of the company being wound up, (b) the conduct of the related company towards the creditors of the company being wound up and (c) the effect that such order would be likely to have on the creditors of the related company.

Parent companies
Shareholders of an unlimited liability company that is being wound up on an insolvent basis are liable, without limit, to make a contribution of an amount equal to the deficit on its balance sheet after its assets have been realised.

Updated: September 11, 2017