What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

Restructuring & Insolvency (3rd edition)

Canada Small Flag Canada

Directors’ Duties

Directors have both statutory and common law duties and may be held liable if their conduct falls below the requisite standard of care, including in circumstances related to a distressed debtor. These duties are not limited to the insolvency period but allegations that such duties were not met are more likely to arise when a company is insolvent. Important duties that directors need to consider are its fiduciary duty and duty of care.

Fiduciary Duty

Directors’ fiduciary duty is the duty directors owe to the company itself and not to its creditors, shareholders or other stakeholders. During an insolvency, the emphasis remains on the company’s best interests. In order to meet this duty, directors must act honestly and in good faith with a view to the company’s best interests. The interests of other stakeholders may be considered as part of the directors’ effort to satisfy their fiduciary duty to the company.

Duty of Care

Directors’ duty of care requires directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. In order to avoid liability in connection with directors’ duty of care, directors must be able to demonstrate, among other things, that they:

i) kept themselves apprised of relevant information;

ii) sought expert opinions where necessary;

iii) considered reasonable alternatives; and

iv) made informed decisions.

Liability of Stakeholders

Generally, a director, corporate parent, or any other stakeholder will not be held liable for the debts of an insolvent company, subject to the exceptions described below.

Directors’ Liability

Certain statutes impose personal liability on corporate directors. All Canadian provinces and territories (which have jurisdiction over matters concerning labour relations) and the federal government (in relation to federally regulated industries) impose personal liability on directors for unpaid wages, accrued vacation pay and termination and severance pay (in certain cases).

Directors are personally liable for payroll remittances for amounts deducted from employee’s wages on account of:

i) income taxes;

ii) Canada Pension Plan (or Québec Pension Plan, as applicable) contributions; and

iii) employment insurance premiums.

The above amounts are deducted from the pay cheques of the company’s employees. They are considered to be similar in nature to trust funds. However, directors have a defence against liability if they can prove:

i) they were duly diligent; and

ii) the failure to remit any required amounts in a timely manner was beyond their control.

Directors can be held personally liable in situations where a company defaults in payment of its goods and services tax or harmonized sales tax (“HST") obligations. Canadian provinces which retain a separate retail sales tax (instead of HST) also impose personal liability on directors for failure to remit the required provincial sales tax.

Directors can also be personally liable for failure to remit certain pension contributions, particularly for amounts which were deducted from the employees’ pay. In addition to specific statutory liabilities, corporate directors can also be personally liable if the director acted improperly so as to cause loss to the company’s creditors.

Finally, if a director provides a personal guarantee in favour of a lender as a condition of advancing credit, there is the possibility of the director being subject to contractual liability.

Notwithstanding the foregoing, directors may mitigate the financial burden of personal liability by seeking indemnification by the corporation, contractual indemnification and directors’ and officers’ insurance.

Parent Company Liabilities

Unless there is a contractual commitment stating otherwise, a parent company is not liable for an insolvent subsidiary’s debts.

However, there is an exception to this rule for certain employee claims. At common law, it is possible for a court to determine that the employees of the insolvent subsidiary were also employees of the parent company, meaning the parent is jointly liable for the debts of the insolvent subsidiary to the employees. This situation may arise if the parent company has exercised common control over the subsidiary. Additionally, in certain circumstances, employment legislation in most Canadian provinces and territories permits liability to be imposed on a related company (such as a parent company, subsidiary or company within the same corporate group).

Under tax legislation it is also possible for the parent to become liable for the insolvent subsidiary’s tax liabilities if the parent company has received assets from the subsidiary for less than fair market value.

British Virgin Islands Small Flag British Virgin Islands

Directors in the BVI owe a range of fiduciary and common-law duties to their companies, and these duties do not terminate with the appointment of a liquidator, though directors cease to have any role in the management of the company save to the extent permitted by the IA and/or the liquidator.

As stated above, when a company nears insolvency, the focus of the directors’ duty to act in the company’s best interests shifts from the members to the creditors. As such, the directors must be mindful of the effect their conduct of the company’s affairs may have on creditors’ likelihood of being repaid what they are owed.

Part IX of the IA deals with malpractice and the principal ways in which a director may be ordered to contribute assets to an insolvent company, including liability for misfeasance, fraudulent trading and insolvent trading. An application pursuant to Part IX can only be brought by a liquidator, but the provisions are not limited territorially.

In the event that a director or officer of the company has misapplied or retained or become accountable for any money of the company, or if the director could be described as being ‘guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company’, then the court has broad powers to make orders that such director or officer repays, restores, or accounts for money or assets or any part of it to the company as compensation for the misfeasance or breach of duty. The IA misfeasance action merely puts the powers at common law on a statutory footing, which provides for a simplified process to bring the claim (as an insolvency application) rather than as a general directors’ duties claim.

The court can make an order against a company’s directors if it is satisfied that, at any time before the commencement of the liquidation of the company, any of its business has been carried on ‘with the intent to defraud creditors of the company or creditors of any other person; or for any fraudulent purpose’. In such cases, the court can declare that the director is liable to make a contribution that the court considers proper towards the company’s assets. This is not limited to directors and officers, but applies to anyone who has been involved in carrying on the business in a fraudulent manner. There is no statutory defence to fraudulent trading, but it is necessary that actual dishonesty be proved.

Directors’ liability for insolvent trading has been summarised above, and as stated in that context any contribution that the court orders under Part IX is compensatory and not penal, and will be used to swell the assets available for distribution to the company’s general body of creditors.

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. However, in deciding who is a ‘director’ the Court is prepared to look beyond the de jure directors and, if other persons have actually been managing the company, de facto directors can be found liable too. However, “shadow” directors (i.e. persons in accordance with whose directions or instructions the directors are accustomed to act) are not within the definition of directors under the BCA.

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.

Cayman Islands Small Flag Cayman Islands

The directors of a distressed company have a duty to act in the best interests of the company and to consider the interests of its creditors (see question 3 above). If a director breaches this duty, then they can face personal liability to the company in the event that the liquidator of the company brings a claim against the director.

A person who was knowingly party to fraudulent trading will be liable to contribute to the company's assets in the liquidation (see question 6 above).

China Small Flag China

The directors, supervisors or officers of an enterprise bear duties of loyalty and care to the enterprise during its business operation. If any of them breaches the foregoing duties, resulting in the bankruptcy of the enterprise, he/she should bear civil liability under law and, in addition, may not hold any position as director, supervisor or officer of any enterprise within three years following the end of the bankruptcy proceedings. When an enterprise is in a deadlock situation, its shareholders, if the enterprise is a limited liability company, or its directors and the controlling shareholder, if it is a joint stock limited company, have an obligation to liquidate the enterprise in a timely fashion, which is a natural extension of the duties of loyalty and care. If their failure to fulfill such duties results in the loss of any major assets, books, important documents, etc. of the enterprise, which renders the liquidation of the enterprise unfeasible, they will be held jointly and severally liable for the enterprise's debts.

Denmark Small Flag Denmark

The board of directors and the executive board (the ”management”) of a business that suffer from cash unavailability must pay particular attention to the so-called ”time of no avail”.

The time of no avail cannot be fixed in advance but it defines the time at which the management ought to have realised that the business could not continue operations properly without any further losses for the creditors.

If the management continues operations beyond the time of no avail, the trustee of the subsequent insolvent estate and creditors that believe that operation beyond the time of no avail has caused losses for the business and/or the creditors may at a later time raise a claim for damages against the former management.

If the business has passed the time of no avail, the management is also obliged to ensure that payment of creditors in an insolvent business takes place in a manner that complies with the ranking of creditors so that some creditors are not given preference over others.

In addition, the management must ensure that the business fulfils the general bookkeeping and tax obligations as these factors are decisive in a later assessment of any management liability.

The management may incur liability, see above, but may also be disqualified by the insolvency court if up to the insolvency the management has not fulfilled its management obligations. Disqualification means that each management member cannot participate in the management of a limited liability company without being personally liable for claims against the company.

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

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 shareholder 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 shareholder cannot incur liability.

France Small Flag France

Directors, while managing the distressed business, need to act in the ordinary course of business. As a matter of corporate law, directors have fiduciary duties towards the company first and as such need to preserve it as a going concern and act in accordance with its corporate interest.

Within the scope of a liquidation proceeding, directors may be personally liable in committing an act of mismanagement that would contribute to an insufficiency of assets in accordance with Article L. 651-2 of the French Commercial Code. Therefore, the liability of directors is only retained for having increased the financial difficulties of the company. Since the Sapin II Law n°2016-1691 dated 9 December 2016 (entered into force on 11 December 2016), the director’s liability may be excluded in the event of a mere negligence in the management of the company.

Directors may also incur criminal liability for criminal bankruptcy (“banqueroute”) set out in Articles L. 654-1 et seq. of the French Commercial Code or other criminal offences set out in Articles L. 654-8 et seq. of the French Commercial Code.

Under French law, the concept of shadow directorship or de facto management (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 management has the same responsibilities as a de jure manager of the company.

Germany Small Flag Germany

Liability of managing directors

The management of (i) a company limited by shares (Kapitalgesellschaft) and/or (ii) a partnership (Personengesellschaft) without a partner who is a fully liable natural person must be very mindful in entity crisis situations. In particular, they should try to solve the crisis as soon as possible, and must monitor the entity’s financial situation and potential insolvency very carefully. Management has general fiduciary duties vis-à-vis the entity and its shareholders until it must file for insolvency due to illiquidity or over-indebtedness.

Among other responsibilities, the management is required to inform the entity’s shareholders in due course. If an annual or any interim balance sheet of a company limited by shares shows that 50% or more of the registered share capital has been lost, the managing directors must call an extraordinary shareholders’ meeting without undue delay. A violation of this duty can constitute a criminal offence and trigger a personal liability for management. In case of an impending illiquidity, a shareholder resolution is required on whether the managers should file for the opening of insolvency proceedings.

Once a company limited by shares or a partnership without a partner who is fully liable natural person becomes illiquid or over-indebted (see Question 3), management must not make any payments (or certain similar reductions of the estate) unless such payments are compatible at that point in time with the due care of a prudent businessperson. A breach of this obligation triggers a severe personal liability for managers, as they must compensate the entity for such payments.

When a company limited by shares or a partnership without a partner who is a fully liable natural person becomes illiquid or over-indebted, each manager must file for the opening of insolvency proceedings without undue delay, and at the latest within three weeks. Managing directors who negligently or intentionally breach this filing obligation commit a criminal offense and are personally liable for damages that can be asserted by (i) the insolvency administrator regarding the damages incurred by creditors of the entity whose claim originated prior to the obligation to file for insolvency, and (ii) by each creditor whose claim originated thereafter.

With regard to liability to social security authorities, the German Criminal Code imposes sanctions on directors who intentionally refuse to pay social security contributions. The same applies to tax debts. The tax code provides for a personal liability of the managing director with regard to tax debts. Additionally, a criminal liability might be applicable. Not paying the employee portion of social security contributions is punishable pursuant to Sec. 266a Criminal Code, as is any action by the debtor that diminishes the debtor’s main assets or obscures the actual development of the business in ways that clearly present a breach of business standards (no bookkeeping, dissipating money or squandering goods, falsifying balance sheets, etc.). If an entity is in a state of insolvency, or if such acts lead to bankruptcy, they are punishable by imprisonment up to five years.

Liability for fraud, especially crimes pertaining to insolvency, is allocated to directors who actually committed the crime or who were fully aware of the crime.

Liability of third parties

Other parties are not liable for the company’s debts—provided there are no guarantees, contractual assumptions of liability or domination agreements. Third parties may, however, be held liable for the company’s debts on grounds of tort. This applies, for example, to the shareholders of the debtor if they acted towards the company in a way that the German Federal Court calls exterminating interventions (Existenzvernichtender Eingriff), i.e., actions that eventually lead to the company failing the test for insolvency. The right of contestation also can lead to civil liabilities for third parties (see Question 6).

Bermuda Small Flag Bermuda

Following the commencement of winding-up proceedings, a director may be held personally liable for the company’s obligations (in such amounts as the court considers just or appropriate) if it is shown that the director:

  • was knowingly a party to the carrying on of the company with the intent to defraud creditors;
  • misapplied, retained or became liable or accountable for any money or property of the company; or
  • is guilty of any misfeasance or breach of trust in relation to the company.

In certain circumstances, a director may also be personally liable for certain categories of the company’s obligations, such as unpaid taxes or pension contributions.

A director may be held civilly or criminally liable pursuant to the liquidation of the company, including:

  • failing to provide the liquidator with full and frank disclosure;
  • fraudulently removing or concealing the assets of the company;
  • falsifying the accounts or affairs of the company;
  • fraudulently inducing a person to provide credit to the company; or
  • dealing with the assets of company with the intent to defraud the creditors.

Guernsey Small Flag Guernsey

Directors owe both fiduciary and non-fiduciary duties to the company. The fiduciary duties of a director include to:

i. act bona fide in the best interests of the company;

ii. act for proper purposes/not to act for improper or collateral purposes;

iii. exercise independent judgement; and

iv. avoid conflicts of interest.

Whether a director has fulfilled his fiduciary duties to the company will be tested (predominantly) subjectively, that is to say, it is contingent upon the director's state of mind.

A directors’ duty of skill and care, however (which is a non-fiduciary duty), is measured both objectively and subjectively. In determining the scope of the duty, a court will consider:

i. the director’s actual knowledge, skill and experience (subjective test); and

ii. the knowledge, skill and experience that may be expected of someone fulfilling that director’s role (objective test).

A director's duty of care and skill cannot be diminished on the basis of the director's actual knowledge and experience (as was once the position at common law), but instead, the bar can only be raised where a director has such experience and skill that one would have expected him/her to have acted differently in the circumstances.

When the company is "in the zone of insolvency", the actions (or inaction) of directors have potential to prejudice the position of the company's creditors. In those circumstances, directors still owe their duties to the company but must discharge them predominantly with the interests of creditors in mind.

In certain circumstances, a liquidator may seek orders from the Court that an officer must account for (or contribute towards) any losses suffered by the company as a consequence of the director's conduct either prior to, or after the company became insolvent. Those remedies may also affect third parties were the ambit of remedies incudes any order necessary to restore the insolvency company to the position it would have been in (see for example preferences above).

Misfeasance/Breach of Duty

Where in the course of the winding up of a company it appears that any director (a) has appropriated or otherwise misapplied any of the company's assets, (b) has become personally liable for any of the company's debts or liabilities, or (c) has otherwise been guilty of any misfeasance or breach of fiduciary duty in relation to the company, the liquidator (or any creditor or member of the company) may apply to the Court for an order against the director in his personal capacity. Any claim must be brought within six years from the date of breach.

If a claimant is successful in proving misfeasance or a breach of duty, the court may order the delinquent director to (a) repay, restore or account for such money or property; (b) contribute sums towards the company’s assets; (c) pay interest upon such amount, at such rate and from such date; as the court thinks fit in respect of the default, whether by way of indemnity or compensation or otherwise.

Wrongful Trading

Where a company has gone into insolvent liquidation at some time before the commencement of the winding up of the company, and a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation, the liquidator (or any creditor or member of the company) may apply to the Court for a declaration that the director shall be liable to contribute to the company's assets.

It will, however, be a defence for a director to demonstrate that he/she took every reasonable step to minimise the loss to creditors, and such action was taken at the appropriate time.

Fraudulent Trading

Pursuant to section 432 of the Companies Law, if any business of a company is carried on with intent to defraud creditors, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of the business in that matter is guilty of an offence.

If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors, the liquidator may apply to the Court for an order that the director contribute to the company's assets. The director may also be criminally liable. The phrases "with intent to defraud creditors" and "for any fraudulent purpose" require a finding of actual dishonesty. If a company continues to carry on business and to incur debts at a time when there is, to the knowledge of the directors, no reasonable prospect of the creditors ever receiving payment on those debts, it can be inferred that the company is carrying on business with intent to defraud.

Ireland Small Flag Ireland

The duties of the directors of an insolvent, or potentially insolvent, company are primarily owed to the company’s creditors. Where the directors are aware of the insolvency they are deemed to hold the assets on trust for the creditors of the company and are obliged to preserve the assets for the benefit of the creditors.

A director of an insolvent company that acts in breach of his or her fiduciary duties to the creditors can be sued for damages, and a purchaser with knowledge of the insolvency that attempts to acquire assets at an undervalue can be required to return or compensate the company and its creditors.

Reckless trading

Directors that are found by the Court to have knowingly engaged in reckless trading (i.e. allowing a company to incur liabilities that the director knows the company cannot or is unlikely to be able to discharge) can become personally liable for the debts of the company, in whole or in part, and without limitation in amount. A director is deemed to have acted knowingly where he or she (a) ought to have known that their actions or those of the company would cause loss to creditors or (b) allowed a company to contract a debt without honestly believing on reasonable grounds that the company would be able to discharge that debt.

The Court may relieve an officer of personal liability for the debts of the company where it is satisfied that the officer acted honestly and responsibly in relation to the conduct of the affairs of the company.

Fraudulent trading

Directors can be found guilty of fraudulent trading if, in the course of an examinership or the winding up of a company, it is proven that the director was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. A person found guilty of fraudulent trading may be exposed to criminal liability as well as personal liability for all or any part of the debts or other liabilities of the company.

Duty to keep adequate accounting records

Directors are responsible for the company’s due administration, including keeping proper accounting records, minutes of meetings and filing information at the Companies Registration Office.

Where a company is wound up, and was unable to pay all of its debts, and it is shown that the failure to keep adequate accounting records contributed to this, or resulted in substantial uncertainty concerning its assets and liabilities, or substantially impeded its orderly winding-up, the company and every director or other officer in default shall be guilty of a criminal offence and moreover a court may declare that any such director or other officer in default shall be personally liable for all or any part of the liabilities of the company.

Restriction and Disqualification orders

A liquidator of an insolvent company is obliged to make an application to the Court for an Order restricting the directors from acting as directors of another company for a period of up to five years, unless the liquidator directed otherwise by the Director of Corporate Enforcement (the “ODCE”). A defence to such an order exists where the director can demonstrate that he or she acted honestly and reasonably in the conduct of the affairs of the company. In addition the directors must demonstrate that they have when requested to do by the liquidator, cooperated as far as could reasonably be expected in relation to the conduct of the winding up. A restricted director can only act be appointed or act in any way, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company where the company has a paid up share capital of €500,000 in the case of a PLC or €100,000 in the case of a private company.

An application can also be brought by a wide range of parties including shareholders, directors, employees, receivers, liquidators, examiners and creditors, for a disqualification order in respect of a director who has been guilty of fraud, a breach of his duties, reckless or fraudulent trading or conduct which makes him unfit to be concerned in the management of a company. A disqualification order will prevent the offender from acting as an auditor, director, receiver, liquidator or examiner or other officer of a company for a period of five years, or such other period as the court may order.

Disqualification and restriction orders can be obtained against any person who is a director of a company on the date of, or within 12 months of, the commencement of the winding up.

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.

Jersey Small Flag Jersey

  1. Directors of Jersey companies owe general duties to

    (i) act honestly and in good faith with a view to the best interests of the company; and

    (ii) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (Companies Law Art.74)

    These duties continue into insolvency. These duties are owed to the company but the duties to take account of the interests of creditors arise as the company enters the zone of insolvency. The duties are owed to the creditors but can only be enforced by the company, whether by itself of by an insolvency appointee.

  2. A director owes a duty to the company to ensure that all the company’s creditors are treated equally and fairly. It follows that where a director allows preferential treatment of some creditors or allows a transaction at an undervalue, to the extent that recovery from the preferred creditor or transacting party is not possible, the director may be liable to make up that difference.
  3. Further, directors should be aware of the obligations to avoid wrongful trading, that is trading while insolvent, which might result in a personal liability for debts incurred after the director ought to have commenced an insolvent winding up process. (Companies Law Art.177)
  4. And further, directors should be aware of the obligation to avoid fraudulent trading, that is engaging in transactions which are intended to defraud creditors, which may result in the directors being personally liable to contribute to the company’s assets to the extent the Royal Court might think fit. (Companies Law Art.178)

Mexico Small Flag Mexico

Prior to 2014, in the absence of an illicit action, directors and officers of a debtor were not liable to creditors. Mexico did not recognize doctrines of wrongful trading. The 2014 amendments provide for a new framework of directors and officers (D+O) liability poorly modeled on the regime applicable to publicly-traded companies.

Pursuant to the 2014 amendments, D+O are liable for certain detrimental actions taken from the moment the debtor is found in general cessation of payment (the zone of insolvency). Unfortunately, the framework is modeled based on the liability regime applicable to publicly-traded companies, which results in certain punishable actions that make sense from an investor public perspective, but that are completely unrelated to solvency issues of the debtor. Actions that give raise to liability include:

  • Voting at directors’ meetings or making decisions with respect to the debtor’s assets with conflict of interest.
  • Knowingly favoring a shareholder or group of shareholders to the detriment of all other shareholders.
  • As a result of their position, obtaining an undue economic benefit for themselves or a third party, including a shareholder or group of shareholders.
  • Generating, disclosing, publishing, providing or ordering information knowing it is false information.
  • Ordering or causing the omission of recording debtor’s transactions.
  • Altering or ordering the alteration of accounts to hide the true nature of debtor’s transactions.
  • Ordering or accepting the registration of false data in debtor’s accounting.
  • Destroying, modifying or ordering the destruction or modification of accounting systems or entries.
  • Altering or ordering the alteration of accounts or contractual terms; registering or ordering the registration of inexistent expenses or exaggerating real ones.

D+O are shielded from liability arising from good-faith decisions taken in compliance with statutory requirements; based on information provided by debtor’s officers, external auditors or expert opinion; have selected the most adequate course of action or the damage to the debtor could not have been foreseen; or have obeyed a licit shareholders’ meeting mandate.

Peru Small Flag Peru

Undergoing an insolvency proceeding does not entail per se any direct legal liability or penalty to shareholders, directors, or managers, which would rather be held responsible based on the diligence or lack thereof with which they have served their positions. In case of negligent conduct on their part, legal actions will be filed against them on a case-by-case basis applying the provisions of the Companies Act; if such negligent conduct or individual acts are not substantiated, their liability will be limited.

It is worth remarking that, pursuant to the Companies Act, directors are accountable, fully and jointly, to the company, its shareholders and third parties for any damages caused by any joint decisions or actions in breach of the law, bylaw, or those performed with wrongful intent, abuse of power, or gross negligence. In addition, directors are jointly liable with the directors who preceded them for any wrongful acts their predecessors may have committed if, once known to them, they fail to disclose such acts in writing to the Shareholders’ Meeting. A civil action against the directors does not abate any criminal liability charged against them, if any.

Additionally, the manager is accountable to the company, shareholders and third parties for any damages resulting from his failure to comply with his duties, or from wrongful intent, abuse of power, or gross negligence. The manager is liable, jointly with the members of the Board of Directors, when he takes part in actions that result in the Directors’ liability or when, once known to him, he fails to disclose them to the Board of Directors or to the General Shareholders’ Meeting. In addition, just as in the case of directors, any civil actions against a manager do not weaken any criminal liability charged with him, if any.

Poland Small Flag Poland

Most important legal duty of the board members relates to filing the bankruptcy petition in the due time. Failure to do so can result in liability towards creditors – directly from board member’s assets.

The management board is obliged also to ensure that all creditors are treated equally and satisfied proportionally. The management board may be liable for damages caused to the creditors in the event of satisfaction of certain creditors selectively as well as in the case of establishing security in favour of certain selected creditors to the detriment of remaining creditors. Such action of the management board may cause (in certain cases) criminal liability of board members.

Other parties cannot incur liability for the debts of an insolvent debtor. However, if given act in law is declared ineffective due to detriment of creditors, the creditors may be satisfied from consideration received by other party to the act.

Singapore Small Flag Singapore

As explained at Question 3 above, directors should be mindful of their duty to a company’s creditors once a company is insolvent – a breach of this duty may result in personal liability being imposed.

In addition, directors should also be careful of the antecedent transactions described at Question 6 above – case law in Singapore has held that a director that permits an antecedent transaction to be carried out is prima facie in breach of his duties. Directors should thus ensure that all transactions leading up to the insolvency of a company can be commercially justified. If there is a fair likelihood of a potential transaction being challenged, directors may wish to consider implementing the transaction through a scheme or judicial management instead.

Sweden Small Flag Sweden

Generally speaking, directors of a Swedish limited liability company owe fiduciary duties to the company and may thus, under certain conditions, be held liable by the company, its shareholders or its creditors for damages caused intentionally or negligently. As for other parties, also an accountant or a shareholder of a company may under certain circumstances incur liability for damages he or she causes to the company, its creditors or its creditors.

Under the Swedish Limited Liability Companies Act, a company’s directors also have a duty to ensure that the company’s equity is intact at all time. And, as soon as there is reason to believe that the company’s equity is eroded by more than half of its registered share capital, certain actions are required in order to either restore the capital reserves or to liquidate the business solvently. In this situation the directors must immediately prepare a balance sheet for liquidation purposes and call a shareholders’ meeting. At that shareholders’ meeting, the balance sheet is presented and the shareholders must decide either to enter into a solvent liquidation, or to continue the business and, in the latter case, the company’s share capital must be fully restored with in eight months. Within that time a second shareholders’ meeting must be called to confirm that the capital reserves are fully restored, otherwise the company must be immediately liquidated. Unless these specific rules of conduct are complied with, the directors may be held personally liable for any debt in the business accruing while this non-compliance is continuing. This liability typically applies to the directors of a company, but any other person acting on behalf of the company while being aware of the directors’ non-compliance, may also be held jointly liable.

Under Swedish law, directors of a company may also be held personally liable for unpaid taxes, if the company goes into bankruptcy with due and unpaid taxes, which will normally be considered the tax authorities as intentional or grossly negligent.

Moreover, directors of a distressed or insolvent company have certain duties under the Swedish Penal Code. For example, a director may face both personal liability for damages and criminal charges for fraudulent trading if he or she, while acting on behalf of the insolvent company, intentionally incurs debt or obligations which the debtor will not be able settle.

Switzerland Small Flag Switzerland

Under Swiss corporate law the highest executive body of a company is responsible for, inter alia, the overall management and strategic positioning of the company, the financial accounting and control, the overall supervision of the management and compliance with laws and regulations generally. Such duties become particularly relevant in a distress scenario in which case a certain shift of responsibilities from management to the highest executive body occurs. Duties and obligations will have to be interpreted in the light of the financial status of the company. In addition, the overarching duties (duty of care, fiduciary duty, equal treatment of shareholders) and certain specific obligations apply in a distress situation:

  • If the latest annual financial statement shows that half of the share capital and the legal reserves of a company are no longer covered by its assets, the directors, inter alia, have to convene an extraordinary shareholders' meeting to which adequate restructuring measures must be proposed.
  • If the board of directors of a Swiss corporate has reason to believe that the company is over-indebted, it must draw up an interim balance sheet without delay, which must be audited by the company's statutory auditors. Such interim balance sheet will have to be prepared on a stand-alone basis and the statutory accounting rules are pertinent. If such interim balance sheet shows that the company is over-indebted at both going concern values and liquidation values, the board of directors of the company must, as a rule, file for bankruptcy without delay.

It is currently being proposed within the context of a general revision of Swiss corporate law (cf. section 3 above) to amend certain of these obligations so as to force the directors to take action at an earlier stage. Such rules are not currently expected to enter into force before 2021.

Sound management may require the initiation of composition proceedings before an over-indebtedness situation exists in case the company is in the state of (looming) illiquidity. Such action may be warranted where an out-of-court restructuring does not appear to be viable and/or where creditor action is expected which may frustrate the attempts for an out-of-court restructuring.

If such duties are not complied with, executive bodies may be exposed to civil law director's liability where the wilful or negligent breach of the director's duties has caused damages to the company or, in certain constellations, the creditors and where there was a causal nexus between the breach and the damage. Where executive bodies failed to timely notify the court of an over-indebtedness situation, damages typically cover the increase of loss that occurred between the date the executive bodies failed to act and submit a notification of over-indebtedness with the competent court and the date bankruptcy proceedings were effectively opened. Further liability risks may arise in the context of transactions that are subject to avoidance (see section 6 above).

In addition, executive bodies may be exposed to the risk of criminal liability if they fail to adhere to their statutory duties and obligations. In particular, such risks exist in case of failure to properly keep corporate books and accounts, mismanagement, where bankruptcy proceedings were caused fraudulently, in case of a fraudulent reduction of assets to the detriment of creditors or in case of creditor preference.

Finally, executive bodies of a Swiss corporate debtor 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 debtor in which case they may become exposed to the risk of director's liability (see 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 above).

Spain Small Flag Spain


United States Small Flag United States

The law of the state in which a business entity is formed and the Code define the fiduciary duties of its directors and officers. As a general rule, the directors and officers of a solvent corporation owe fiduciary duties only to its shareholders. When the corporation becomes insolvent, however, these fiduciary duties expand to the entire enterprise including the creditors of the corporation.

Directors and officers owe two core fiduciary duties – duty of care and duty of loyalty. The duty of care requires that they act with the degree of care that an ordinarily prudent person would exercise under the same or similar circumstances, including informing themselves of material information reasonably available to them, and acting in a rational and deliberate manner. Under the duty of loyalty, they must act in good faith to make decisions that are in the best interests of the company and refrain from self-dealing and usurping corporate opportunities for personal gain. If directors and officers breach any of their regular fiduciary duties or the additional obligations imposed upon a debtor in a bankruptcy case, they are subject to personal liability (subject to any exculpation and indemnification rights they may possess) and/or removal.

Shareholders of a closely held company are normally shielded from liability for the debts of a corporation, but they may become obligated to pay such debts if a court “pierces the corporate veil,” thereby disregarding the legal separateness of the corporation. Although courts employ different tests, piercing the corporate veil generally requires a finding that the corporation was formed for an improper purpose and that the officers and directors failed to observe corporate formalities.

United Kingdom Small Flag United Kingdom

Directors of an English company owe fiduciary duties to the company itself. In the case of a healthy company, directors have a duty to act in a way most likely to promote the company’s success for the benefit of its shareholders as a whole. However, in the zone of insolvency - when the directors know or should know that the company is or is likely (i.e. probable) to become insolvent - this duty shifts to the creditors of the company.

A breach of these duties may lead to directors incurring personal liability or being disqualified from acting as a director or from being involved in the management of a company for a specified period. In some instances, it may lead to a criminal prosecution.

The principal potential causes of action are: wrongful trading, fraudulent trading, and a claim for misapplication of company property / misfeasance. Directors are generally most cognizant of the wrongful trading offence. Wrongful trading is established where a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation or administration, and the director failed to take every step to minimise potential losses for creditors.

In addition to financial penalties, these offences can lead to a disqualification order for future directorships.

Liability may extend to third parties in certain, fairly limited, circumstances. 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. The Pensions Regulator can exercise moral hazard powers over a connected third party that 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 pension scheme. Further, 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.

Hungary Small Flag Hungary

The directors shall manage the company in a way to protect the interests of the company, however, in case of threatening insolvency situation the directors shall primarily protect the interests of the creditors. If the insolvency cannot be avoided the directors shall file for insolvency.

In the event of abuse of limited liability on the part of any member or founder of a legal person, on account of which any outstanding creditors’ claims remain unsatisfied at the time of the legal person’s dissolution without succession, the member or founder in question shall be subject to unlimited liability for such debts.

The liability of the owners and shareholders mostly depends on the legal type of the company. Members of a general partnership shall undertake joint and several liability for the partnership’s obligations that are not covered by the assets of the partnership. What is more, the liability of a new member for the obligations originating prior to his admission to the partnership shall be identical to that of all other members. Any agreement of the members to the contrary shall be null and void with respect to third parties.

In a limited partnership (betéti társaság or bt.), the members of the partnership agree to make available to the partnership the capital contribution necessary for its activities, and at least one of the partners ("general partner”) undertakes joint and several liability together with the other general partners for the partnership’s obligations not covered by the assets of the partnership, while at least one other partner ("limited partner”) is only liable for the obligations of the partnership limited to its interest therein. There is only one exception to this provision: if the partnership’s general partner becomes a limited partner, he shall remain liable in accordance with the provisions applicable to the general partner within a preclusive period of five years from the date of becoming a limited partner for the partnership’s debts arising before the change.

The liability of members of private limited liability companies extends only to the provision of their initial contributions, and to other contributions set out in the memorandum of association. Generally, the members shall not bear liability for the company’s obligations. If, upon an order of liquidation, the initial capital of the company has not yet been paid up in full, the liquidator has the right to make outstanding payments due with immediate effect, and to order the performance thereof by the members, if this is necessary in order to satisfy the debts of the company.

In a limited company, the obligation of shareholders to the limited company extends to the provision of funds covering the nominal value or the accounting par value of shares. Generally, the shareholders shall not be held liable for the limited company’s obligations.

Belgium Small Flag Belgium

A debtor is obliged to file for bankruptcy within one month after the conditions for bankruptcy have been met. Failure to do so may trigger civil and/or criminal liabilities for directors of the debtor.

The new insolvency law introduced the concept of wrongful trading. If in the event of the bankruptcy of an enterprise, the debts exceed the proceeds, the current or former directors, managers, day-to-day directors, as well as all other persons who actually have had management authority, can be held personally and jointly liable for all or part of the debts of the bankrupt if such person involved knew or should have known that there was apparently no reasonable prospect of maintaining the enterprise or its activities and of avoiding bankruptcy and did not take the reasonably required actions.

Directors can under certain circumstances also be held jointly liable for not paying social security contributions, tax or VAT by the relevant administration.

The founders of a private limited liability company (BVBA/SPRL) can be held liable if the debtor goes bankrupt within 3 years from its incorporation and if it appears the financial plan to be provided at the time of incorporation shows a manifest underfunding of the company from the start. Pursuant to the new company code, a more detailed financial plan will be required for limited liability companies incorporated as of 1 May 2019.

The new company code also introduces a liability cap for directors. The liability of directors will be capped at EUR 250,000, EUR 1,000,000, EUR 3,000,000, or EUR 12,000,000 depending on the revenue and assets of the company. The cap will not apply in the event of fraud, gross negligence, or repetitive minor misconduct or in relation to the abovementioned liability for unpaid social security, tax or VAT.

Israel Small Flag Israel

As noted above, under current legislation, officers owe fiduciary duty and duty of care towards the corporation.

Furthermore, in cases where the company's legal entity has been abused in order to defraud or discriminate a creditor, or in cases where the company was managed in a way which posed an unreasonable risk to its ability to repay its debt to creditors, the Court may order "piercing of the corporate veil" and may attribute the company's debt to shareholders.

In addition, pursuant to provisions of the Companies Ordinance, anyone who knowingly took part in fraudulent management of the company, may be personally liable, without limitation, for the company's debts and may subject to imprisonment.

The officers of a distress company may also be charged with payment of compensation for the damage incurred by the company as a result of an unfair use of the company's funds or assets.

The Insolvency Law stipulates a similar arrangement regarding party who knowingly took part in fraudulent management of the company, but limits the liability thereof to the amount of damage incurred due to fraudulent management of the company.

Furthermore, as set forth in section 3 above, the Insolvency Law stipulates a specific arrangement which imposes liability on a director or on the CEO, if they knew, or should have known, that the corporation is insolvent.

Romania Small Flag Romania

The directors shall manage the company in such a way so as to protect the interests of the company; however, in case of threatening insolvency situation the directors shall primarily protect the interests of the creditors. If the insolvency cannot be avoided the directors shall file for insolvency.

The liability stipulated by art. 169 of Law 85/2014is not an extension of a bankruptcy procedure to the members of the board of directors/managing bord, but it is a personal responsibility that only intervenes when, by carrying out any of the activities listed in the text of the law, the responsible persons have contributed to placing the debtor company in an insolvency status.

Updated: June 5, 2019