Liabilities of directors

Under the Commercial Code, if the net equity of the company falls under one fourth of the share capital because of losses incurred by the company (as acknowledged in the accounting documents), the board of directors must convene an extraordinary shareholders’ general meeting within four months of the approval of the financial statements in which the loss appeared in order to resolve on the company’s early dissolution.

Offences under the Commercial Code relating to mismanagement may also apply (see Breach of general duties).

A director (or directors jointly) can be held personally liable for the debts of the company if they allow it to continue trading whilst it is insolvent or insolvency would objectively have been suspected.  There are a limited number of defences, including where:

• The "safe harbour" regime applies, which provides directors with a safe harbour from civil insolvent trading provisions where they are developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment, by the company, of an administrator or liquidator.
• The director can prove that they took reasonable steps to prevent the company incurring the debt.
• The director had reasonable grounds to expect, and did expect, the company to be solvent when the debt was incurred.
• The director received adequate information as to the solvency of the company from a competent and reliable person fulfilling the responsibility to provide such information, had reason to believe that person and did believe the company was solvent and would remain solvent when the debt was incurred.
• The director was not taking part in the management of the company due to illness or some other good reason when the company traded insolvent.
• The director acted honestly and reasonably in the circumstances when the company traded insolvent.

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency.  Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading.  These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties.  Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors.  In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

Unless the director is also a shareholder, generally speaking they will not incur any liability on insolvency. If they have acted in bad faith, resulting in the insolvency or the hiding of key assets from a liquidator, then liabilities may attach.

In addition to the general liabilities of directors, specific liabilities may arise if the company is insolvent or nearing insolvency. More particularly, a director (both former and current, including a de facto director) may, inter alia, incur liability for:

• Failure to comply with the obligation to file for bankruptcy/judicial reorganisation within one month of the cessation of payments where it satisfies the conditions for bankruptcy (i.e. the company has stopped paying debts as they fall due and it no longer has access to credit).
• The insufficiency of the company's assets/unpaid debts if it is demonstrated that a manifestly serious mistake on their part has contributed to the bankruptcy of the company.
• The insufficiency of the company's assets (debts surpass the income) in the case of wrongful trading, i.e. where the director knew or should have known, at any time prior to the bankruptcy, that the company had no reasonable prospect of avoiding a bankruptcy, and has not acted in accordance with how a reasonable prudent director would have acted in the same circumstances. If these cumulative conditions apply, the director may be held personally (and jointly and severally) liable to pay the whole or part of the deficit to the company’s estate. A claim can however solely be initiated by the curator.

It is sufficient that the error contributed to the bankruptcy. It is up to the courts to decide whether or not such directors will be held severally liable and the portion of the existing liabilities they will have to bear.

A director has a duty to engage into contracts on behalf of the company which the company can fulfil its obligations. Thus, a director of a company who is knowingly party to the contracting of a debt by the company and had, at the time the debt was contracted, no reasonable or probable expectation, that the company would be able to pay the debt, shall, on the application of the liquidator or of the creditor concerned in the winding up of the company, be liable for the whole or any part of any loss suffered by the creditor to whom the debt was incurred.

As a general rule, directors are not responsible for the company's insolvency if they have acted in compliance with all their fiduciary duties. This is an application of the business judgement rule recognised by the courts.

However, directors must not:

• Induce managers, senior executives, account inspectors or external auditors and risk rating agencies, to render irregular accounts, present false information or conceal information.
• Present to shareholders irregular accounts, present false information or conceal essential information.
• Borrow the company's money or property or use them for personal or another person's benefit.
• Use for their own benefit or related third parties, causing damage to the company, the commercial opportunities of which they have knowledge because of their position.

In addition, the Corporations Act presumes the directors will be jointly and severally liable for the damages caused to the company, its shareholders and third-parties if:

• The company does not keep its corporate books or registries.
• Provisory dividends (dividendos provisorios) are distributed and the company has accumulated losses (those directors that approved the distribution will be liable).
• The company conceals its assets or property, or it recognizes presumed debt or simulates the sale of goods and properties, amongst other things.

 There are other considerations in other legal bodies, such as the Bankruptcy Law.

See What are directors’ other key obligations?

The board of directors must continuously assess if it is reasonable to carry on the operation of the company. If this is not the case, the directors must file an application for dissolution, restructuring or bankruptcy on behalf of the company. Thus, directors may be held liable under certain circumstances if an application for restructuring or bankruptcy has not been filed in a timely way.

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. 

If the board of directors notices that the company has negative equity, the board must promptly make a register notification to the Trade Register on the loss of share capital. If this notification is not made, the members may be liable for damages caused to the creditors.

Certain actions to diminish assets or increase liabilities or favour certain creditors in case of insolvency are criminal offences and could also cause liability for damages.

• Liability for the company’s debts (action en comblement de passif):
  
  The director of a company facing an asset deficiency (insuffisance d’actif), in the context of insolvency proceedings, may be held personally liable for the debts of the company if their actions, in breach of the director's powers, have led to the asset deficiency. The director may only be held liable in such context if they have committed a management fault (faute de gestion) which led to the assets shortfall. In this case, there is no potential relief.
• Deliberately causing the insolvency of a company (banqueroute):
  
  A director may be held personally liable where the director has:
  • Made purchases with a view of reselling at a lower price, or used destructive means in order to receive funds, with an intention to avoid or delay the opening of receivership of the company.
  • Misappropriated or concealed all or part of the assets of the company.
  • Fraudulently increased the liabilities of the company.
  • Falsified the accounts or removed accounting documents of the company.
  • Failed to keep accounts in accordance with legal regulations (including manifestly incomplete accounts).

In addition to the liabilities set out in Breach of general duties, the following applies:

• The managing director must prevent a financial crisis of the company by setting up an early warning system, by taking appropriate countermeasures and reporting to the supervisory bodies.
• If the annual (or any interim) balance sheet shows that half or more of the share capital has been lost, the managing directors must call a shareholders' meeting without any undue delay.
• In the event of insolvency, i.e. illiquidity or over-indebtedness, the managing director is obliged to file for insolvency. The application must be filed without undue delay, but no later than three weeks (in the case of illiquidity) or after six weeks (in the case of over-indebtedness) after the event of insolvency. Failure to do so may result in severe civil and criminal liability. (For example, if the managing director continues to make payments on behalf of the company after the company has become insolvent, such director shall be personally liable to the company for the loss incurred by the creditors, unless the payments are consistent with the diligence of a prudent and conscientious manager. The same applies to any payments made to the shareholders which lead to the insolvency of the company.)

A director may incur additional liabilities upon a company’s insolvency where it appears that a business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for a fraudulent purpose. A director who is declared by the court to be a knowing party to the carrying on of the business in such manner, may be held personally responsible, without limitation of liability, for the debts or any other liabilities of the company that the Court may direct. The Court’s powers here are very wide as it may make any other directions to give effect to this declaration.

The director may also be disqualified from acting as director for a period specified by the Court and may be liable on summary conviction to a fine or a term of imprisonment or both.

Furthermore, a director who causes a company to engage in any form of business or trade or incur a debt or liability where the director has reasonable grounds to believe or ought to have known that the company is insolvent or will become insolvent commits an offence and may be liable on summary conviction to a fine or a term of imprisonment or both.

If the company is of doubtful solvency or on the verge of insolvency or is insolvent, there is an obligation on the directors to take into consideration the interests of the company’s creditors when they discharge their duties as directors.

In the course of the winding up of a company, the potential civil liabilities that may arise include:

• If in the course of the winding up, it appears that any persons were knowingly a party to business being carried on with the intention of defrauding creditors or for any fraudulent purpose, such persons can be made personally liable to make contributions to the assets of the company. A director is not allowed to incur further credit for the company when knowing there is no reasonable prospect of avoiding the company’s insolvency.
• If it appears that any past or present officer of the company (i.e. including a director) has misapplied or retained, or become liable or accountable for, any money or property of the company, or is guilty of a misfeasance or breach of duty in relation to the company, the court has the power to order the director to repay or restore the money or property or any part thereof with interest, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, or breach of trust as the court thinks just.

Potential criminal liability in the course of winding up include:

• If any officer of a company, which is subsequently wound up:
  • has made or caused to be made any gift or transfer of or charge on, or has caused or connived at the levying of any execution against, the property of the company; or
  • has concealed or removed any part of the property of the company since, or within 2 months before, the date of any unsatisfied judgment or order for payment of money obtained against the company,

with intent to defraud creditors of the company, such officer will be guilty of an offence and is liable to a fine and imprisonment.

• If any officer carried on the business of a company with intent to defraud creditors and misfeasance, in addition to the civil liabilities, such persons can also be subject to criminal liabilities including imprisonment and a fine.

Apart from the above, there are also a number of offences that could be committed by past or present officers of the company (such as falsifying records, concealing debts or not cooperating with the liquidator) in the course of or during the period of 12 months prior to winding up of the company.

Focusing on officer liability in the context of bankruptcy and liquidation proceedings, Hungarian law prohibits “wrongful trading” by directors. This involves two stages as follows:

• Establishment of liability. Any creditor or - in the debtor’s name - the liquidator may bring an action during the insolvent liquidation procedure of a company to establish that a person who had been a director of the company within the three year period prior to the opening of liquidation procedure failed to exercise his duties in the interest of the creditors after the threat of insolvency of the company had arisen and as a result of such failure the company’s assets have diminished or satisfaction of the creditors’ claims have been frustrated for other reasons. For the purpose of the foregoing, amongst others, non-compliance with the rules on the protection of the environment is also considered as a failure to take into account the creditors’ interest. The court may not establish the director’s liability if he can prove that following when the threat of insolvency of the company had arisen he did not take any business risks that could be considered unreasonable in the light of the company’s financial position and that he took all steps that can be reasonably expected from a director to mitigate the losses of creditors , including by the initiating the actions of the general meeting.
• Claim for unsatisfied losses. Following the publication of the court’s resolution on the conclusion of insolvent liquidation of the company in the Company Gazette, any creditor may bring an action for ordering the (former) directors of the liquidated company whose liability was established in the course of the insolvency procedure (as set out above), for satisfying its claim registered in the liquidation proceedings that has remained unsatisfied (up to the loss resulting from the wrongful trading).

The above rules also apply if the court of registration strikes off a company from the company register in any involuntary deregistration procedure (kényszertörlési eljárás), i.e. not in an insolvent liquidation procedure. An involuntary deregistration procedure (kényszertörlési eljárás) is pursued by the court of registration if the company’s operation is not in compliance with the applicable laws and such compliance is not remedied despite the measures of the court of registrations imposed on the company.

If a company becomes bankrupt due to the fault or negligence of the BOD and the bankruptcy assets are insufficient to pay the company’s liabilities, each director will be jointly responsible for the unpaid liabilities.

This liability also applies to a director that is at fault or negligent and who served as a director within five years prior to the bankruptcy decision.

Under the Company Law, the director won’t be liable for the bankruptcy if they can prove the following:

• The bankruptcy was not due to their fault.
• They have managed the company in good faith, prudently, and with a sense of full responsibility for the interest of the company and in accordance with the objects and purposes of the company.
• They have no conflict of interest whether directly or indirectly.
• They have taken actions to prevent the bankruptcy.

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency.  Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or reckless trading.  These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties.  Liability for reckless trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors.  In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

Liability for the company’s debts (action en comblement de passif):

The director of a company facing an asset deficiency (insuffisance d’actif), in the context of insolvency proceedings, may be held personally liable for the debts of the company if their actions, in breach of the director's powers, have led to the asset deficiency. The director may only be held liable in such a context if they have committed a management fault (faute de Gestion) which led to the asset’s shortfall. In this case, there is no potential relief.

Deliberately causing the insolvency of a company (banqueroute):

A director may be held personally liable where the director has:

• Made purchases with a view of reselling at a lower price, or used destructive means in order to receive funds, with an intention to avoid or delay the opening of receivership of the company.
• Misappropriated or concealed all or part of the assets of the company.
• Fraudulently increased the liabilities of the company.
• Falsified the accounts or removed accounting documents of the company.
• Failed to keep accounts in accordance with legal regulations (including manifestly incomplete accounts).

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. 

Directors have criminal liability if they commit offences during either:

• Ongoing insolvency proceedings.
• The period before a company is declared insolvent, under certain specific circumstances.

The main insolvency crimes include:

• Bankruptcy (bancarotta semplice).
• Fraudulent bankruptcy (bancarotta fraudolenta).
• Illegal applications for loans (ricorso abusivo al credito).
• Declaration of non-existing creditors (denuncia di creditori insesistenti).

In general terms, the board members are liable towards the company's creditors if they fail to comply with the obligations related to the preservation of the integrity of corporate assets. The relevant liability action can be exercised by the creditors when the company's assets are insufficient to satisfy the debts owed; should the company waive its liability action, this shall not influence the creditors' right to bring an independent claim.

In case of bankruptcy or other “procedura concorsuale” the actions for liability are filed by the “curatore fallimentare, commissario liquidatore or commissario straordinario”. The actions for liability owed to the company  and owed to the creditors  converge in a unitary action, filed by the official receiver. Accordingly, the creditors lose the right to sue the director directly.

In that case, the director’s liability to the company creditors is of an extra contractual nature and arises when the director does not comply with  duties concerning the preservation of the capital stock integrity and the action can be filed only when such stock capital is insufficient to pay off their debts. The requirements to bring an action against the director are:

• Their unlawful conduct (contrary to the duties established by the law or by the by-laws).
• A prejudice for the creditors represented by the insufficiency of the stock capital in order to satisfy their debts (and the insufficiency does not mean insolvency: there can be insolvency when there is not liquidity, but the assets could however be sufficient).
• A causal nexus between the prejudice and the conduct.

The Italian Civil Code imposes on directors of all types of business that act as corporations or in collective form a duty to take the necessary steps to adopt an organizational, administrative and accounting structure that is adequate given the nature and size of the company, to promptly detect a situation of crisis and the loss of going concern status and to  adopt and implement without delay those instruments provided by the regulations to overcome the state of crisis and restore the company as a going concern.

Alongside this innovative duty to monitor the evolution of financial dynamics from the perspective of the company’s going concern status, the law also sets out a more traditional duty to verify the static situation of the corporate assets, with aggravated liability deriving from requirements for the directors to limit management solely to the conservation of the company’s assets after the occurrence of a cause of dissolution (including the erosion of net equity for losses not followed by recapitalization: so called “recapitalize or liquid rule”).

There is no special liability caused by an insolvency of the company. However, as described above, a third-party creditor may be able to bring an indemnity claim against a director who acted in bad faith or gross negligence.

Additional personal liabilities may arise for directors if the company is insolvent or is facing a significant insolvency risk. Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading. These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties. Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors. In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

Under the Luxembourg Commercial Code, in case of bankruptcy, managers can be held liable based on their serious and characterized misconduct or if they have conducted the business in their personal interest.

In that case, managers may be subject to claims based on additional liability grounds. The company’s bankruptcy may be extended to any legal or de facto manager who, acting under the corporate veil, has entered into commercial transactions for their own account, has benefited or disposed of the company’s assets as if they were their own or has pursued a loss-making business activity which was predestined to lead to bankruptcy, in their own interest and in an abusive manner.

A court may ban from office any manager who has committed serious offences or breaches of duty which have contributed to a company's bankruptcy.

The Companies Act places a mandatory obligation on a  director of a company who believes that the company is unable to pay its debts as they fall due to forthwith call a meeting of the Board to consider whether the Board should appoint a liquidator or an administrator, or to carry on the business of the company.

If a director fails to do so and at the time of such failure, the company was unable to pay its debts as they fell due and the company is subsequently put in liquidation, the Court may, on application of the liquidator or of a creditor of the company, make an order that the director shall be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade.

At a meeting called to consider whether the company should appoint a liquidator or administrator, if the Board does not resolve to appoint a liquidator or an administrator although at the time of the meeting there were no reasonable grounds for believing that the company was able to pay its debts as they fell due and the company is subsequently placed in liquidation, the Court may, on the application of the liquidator or of a creditor of the company, make an order that the directors, other than those directors who attended the meeting and voted in favour of appointing a liquidator or an administrator, shall be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade.

Pursuant to Mexican bankruptcy law (Ley de Concursos Mercantiles), directors and key employees will be liable to indemnify the company in insolvency for the insolvency of the company when such directors and key employees:

• Vote at meetings of the board of directors or make decisions related to the debtor's assets, where there is a conflict of interest.
• Knowingly favour a certain shareholder or group of shareholders of the company, to the detriment of the other shareholders.
• Obtain without legitimate cause, by virtue of their employment, position or commission, economic benefits for themselves or procure them in favour of third parties, including a specific shareholder or group of shareholders.
• Generate, disseminate, publish, provide or order information, knowing that it is false.
• Order or cause the recording of financial transactions carried out by the company to be omitted, or alter or order the alteration of the records to hide the true nature of the transactions carried out, altering the financial statements.
• Order or accept the entry of false data in the debtor's accounts.
• Destroy, modify or order the total or partial destruction or modification of accounting systems or records or the documentation that gives rise to the debtor's accounting entries, prior to the expiration of the legal retention periods and with the purpose of concealing their record or evidence.
• Alter or order that the accounts or the conditions of the contracts be modified, make or order the recording of non-existent operations or expenses, exaggerate the real ones or intentionally carry out any illegal act or operation prohibited by law, generating in any of such assumptions a debt, loss or damage to the debtor's assets, for their own economic benefit, either directly or through a third party, or third parties, including the registration of liabilities in favor of the persons with conflict of interest.
• In general, carry out intentional acts, act in bad faith, or otherwise, carry out acts which are illicit in accordance with this law or other laws.

Additionally, during the conciliation stage of bankruptcy proceeding, directors must always act as diligent managers in their own business, and will be liable for any loss or damage suffered by the company due to their fault or negligence. If the removal of the director from the administration is declared, the conciliator shall assume, in addition to their own powers, the powers and duties of administration attributed to him by the law. Thus, the conciliator will have to act as a diligent administrator acting in their own business, and will be liable for any loss or damage suffered by the company due to their fault or negligence. Likewise, the conciliator must take the necessary steps to identify the assets owned by the director declared in insolvency proceedings that are in the possession of third parties.

Further, the conciliator must oversee the director/board of directors´ of the company, to prevent the sale of assets or any fraud on creditors, otherwise they could also be subject to a criminal sanction.

Moroccan law specifies that, in a PLC, the members of the board of directors, the general manager (and, where applicable, the delegate general manager or the members of the board of directors) are liable, individually or jointly, as the case may be, to the company or to third parties, either for infringements of the legislative or regulatory provisions applicable to PLCs, or for breaches of the articles of association, or for faults committed in their management or for acts taken outside the interest of the company, during the execution of the mandate they have received.

Even if the liability of the managers/directors is subject to specific provisions which specify its scope, their civil liability is governed by the general law of liability, which, in order to be engaged, requires a fault, a prejudice and a causal link between the fault and the prejudice concerned.

Under the Mozambican Insolvency Law, there are civil and criminal liabilities for directors if:

• the director, through falsification of written documents, inaccurate accounting, simulation, concealment of accounting documents, artificial creation or aggravation of losses or reduction of profits, or any other dishonest act before, during or after the declaration of insolvency, the granting of judicial business rescue or the deposit of the extrajudicial rescue plan, harms the interests of creditors, for the company´s benefit, their own benefit or that of third parties;
• the director provides false information or statements in the procedures of insolvency, judicial or extrajudicial business rescue, with the aim of misleading the judge, creditors or representative of the Public Prosecutor Office;
• the director illicitly disposes, dissipates or encumbers the company´s assets in the course of insolvency proceedings, judicial or extrajudicial business rescue, for the benefit of the company or their own benefit or with the intention of favouring one or more creditors, to the detriment of others;
• the director appropriates, dissipates or hides assets of the debtor company in the course of insolvency procedures, judicial or extrajudicial business rescue, by himself/herself or through a third party;
• the director fails to comply with the obligation of having organized commercial bookkeeping suitable for the company´s activity, before or after the sentence that determines the insolvency, the judicial business rescue or of the deposit of the conciliation or mediation minutes; and
• the director, during the course of insolvency procedures, judicial or extrajudicial business rescue, refuses to comply with or fails to comply with the order or instructions of the judge.

A director convicted of any of above will be also prohibited:

• from acting as a director, or exercising any administrative office, in any company and prohibited from exercising any commercial activity; and
• from managing any company under a mandate or a title for business management.

When it appears (whether in a winding-up procedure, judicial management procedure or otherwise) that any business of the company was or is being carried on recklessly, or with the intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court may declare that any person, who was knowingly a party to the carrying on of the business in that manner, is personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company.  Proceedings may be instituted by application or action by the master, the liquidator, the judicial manager, or any creditor, member or contributory of the company.

As a general principle, directors will not be held liable for the (inevitable) risks of entrepreneurship (ondernemersrisico). However, if a company is declared bankrupt, the directors are personally liable for the deficit in bankruptcy if the bankruptcy is caused by their apparent negligence (kennelijke onbehoorlijke taakvervulling) to a significant extent during a period of three years prior to the date of bankruptcy. The burden to prove that the decisions which lead to the miscalculation, financial setback or disappointing investments were taken with proper caution lies with the respective director(s).

Under Dutch law the board is obliged to keep financial records in such a way that all assets and liabilities of the company can be determined at any time and that the annual accounts and other financial information are duly filed with the trade register of the Dutch Chamber of Commerce. If one of these obligations has not been fulfilled, two statutory presumptions apply:

• An irrebuttable presumption (niet weerlegbaar vermoeden) that there has been apparent negligence.
• A rebuttable presumption (weerlegbaar vermoeden) that the apparent negligence is a significant cause of the bankruptcy.

In the event that a director will be considered to have evidently improperly performed their duties which will be regarded as a significant cause of the bankruptcy, each director can consequently be held jointly and severally liable for the shortfalls in the estate of a bankrupt company.

An individual director can only avoid liability if they are able to prove that:

• They have not been negligent (nalatig) as far as the improper management is concerned.
• They have not been negligent in taking measures to prevent the consequences of improper management. 

A claim on this basis can solely be instituted against the director(s) by the trustee in the bankruptcy (curator) on behalf of the collective creditors. Only improper management in the three year period prior to bankruptcy can serve as a basis for such a claim. The Dutch court has the authority to reduce the amount for which directors are liable on a collective or individual basis. 

Dutch law imposes liability in the event of bankruptcy of the company not only on directors, but also on policy-makers (feitelijke beleidsbepaler). Such a policy-maker may be held personally liable for the deficit in bankruptcy as if they were a director of the company.

Personal liability may arise for directors if the company is insolvent or nearing insolvency. Directors who knowingly or negligently allow a company to carry on “reckless trading” or trading while insolvent may be held personally liable for the unsatisfied liabilities of the company in the event of the company's failure. In those circumstances the director may be liable to contribute to the company's assets on a winding up, the shortfall owed to creditors from the point of insolvency to the time of failure and, in the case of carrying on the business fraudulently or dishonestly incurring debt, to criminal penalties.

If, in the course of a liquidation of a company, it appears to the court that a person (including a director or former director or the company) has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator, creditor or shareholder:

• inquire into the conduct of the director and 
• order the director:
  • to repay or restore the money or property or any part of it with interest at a rate the court thinks just or
  • to contribute such sum to the assets of the company by way of compensation as the court thinks just, or
• where the application is made by a creditor, order that director to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.

Directors may be held personally liable for fraudulent or wrongful trading if the company is insolvent or nearing insolvency.

If, during the winding-up of a company, it appears that the business of the company has been carried on in a reckless manner, or for any fraudulent purpose, the directors who knowingly allowed it may be held personally responsible for the liabilities of the company, without any limitation of liability. In the case of fraud, the director commits an offence, and is liable on conviction to a fine or to imprisonment for a term of two years or both. Liability may however be avoided if the directors can show that they took every step they possibly could to minimise the potential loss to the company’s creditors.

Where a director makes a statutory declaration of solvency where they have no reasonable grounds for making the declaration, if convicted, the director will be liable to a fine in addition to imprisonment for a term of three months.

If the company has gone into insolvent liquidation and at some time before the commencement of the winding-up of the company, the directors knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, they may be held liable to make any necessary contribution to the company’s assets.

It is the responsibility of the board of directors to submit any petition for debt negotiations or bankruptcy proceedings in relation to the company. The board of directors represents the company as bankruptcy debtor in bankruptcy proceedings. Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading.

If, when preparing the latest annual financial statements of the company, or a lesser period, the loss of half or more than a half of the capital has occurred, or shall be presumed, the board must immediately call a shareholders' meeting to inform them about the financial situation of the company.

When assets of the company are not sufficient to meet its liabilities, the board must, within no more than 15 calendar days of such occurrence, call the creditors and request, if applicable, the insolvency of the company.

If a company has losses that reduce its net assets (patrimonio neto) to an amount which is less than one third of the capital stock of the company, without this position being regularised by shareholders, this is a cause for dissolution of the company according to law.

If the company continues doing business despite having incurred a cause for dissolution, the company becomes irregular. In such case, directors (as well as managers and any other representatives and attorneys, duly appointed or de facto) will be personally liable for the acts executed by them in representation of the company since the irregularity occurred.

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. As a general statutory rule, if enforcement proceedings against the company prove ineffective, the management board members are jointly and severally liable for the company's liabilities. However, a management board member may be discharged from such liability if they prove that:

• A petition in bankruptcy was filed on time.
• At the same time, an order was issued to open restructuring proceedings or to approve an arrangement in proceedings regarding approval of an arrangement.
• The failure to file a petition in bankruptcy occurred through no fault on their part.
• Despite the failure to file a petition in bankruptcy or to approve an arrangement in proceedings regarding approval of an arrangement, no creditor suffered damage.

After insolvency is declared by a Court of Law a specific procedure called “Qualification of the Insolvency” may be opened in order to qualify, or not, the insolvency as intentional. Insolvency is deemed to be intentional when it is considered to be the result of intentional or negligent conduct by the insolvent company or its directors. In the event that a Court of Law decides to qualify the insolvency as intentional, directors that have been proven to have acted intentionally or with negligence, may be disqualified for carrying on business activities during a defined timeframe, up to a maximum of ten years.

The financial consequences that may arise for the company’s directors in cases of proven intentional insolvency are the following:

• Loss of any credits (including labour related credits) that these directors may have over the company.
• Restitution of the assets or rights that they may have already received as payment for those credits.
• Joint payment of unsatisfied credits up to the limit of their own personal assets.

Additionally, please note that the directors may be held personally liable from a criminal perspective for intentional insolvency, if there is evidence of fraud or intentional misconduct, as a result of acts or omissions, that decrease, compromise, make difficult, endanger or delay the satisfaction of creditors and that may have directly caused the company’s insolvency status. If the directors are found guilty of such a criminal offence of faulty insolvency or faulty management, they may also become civilly liable for the damages arising out of their criminal actions or omissions.

Under the Qatari companies law,  there is a risk that directors/managers may be personally liable for losses incurred as a result of any failure to call a meeting of the shareholders within 30 days of losses reaching half of the issued capital.

In a bankruptcy context, if it is established that the LLC has insufficient assets to pay at least 20% of its debts, the court may order some or all of the directors/managers jointly and severally to pay all or some of the company's debts. A defence is available if it can be established that they exercised reasonable diligence in managing the company's affairs.

Law no. 85/2014 on insolvency proceedings (Insolvency Law) extends, under certain specific conditions, the liability for part or the entirety of the uncovered debts of the insolvent company to the members of the management bodies and any other person to which the company's insolvency may be imputed, to the extent they performed certain unlawful actions, such as:

• Using the company’s assets or credit in their own benefit or that of another person.
• The decision (in their own interest) to continue an activity which has the evident result of the company’s insolvency.
• Maintaining fictitious accounting documents, deleting or disposing of accounting documents or not keeping the accounting books and records according to the law.
• Using ruinous methods to obtain funds, in order to delay the insolvency, etc.

The Romanian Criminal Code provides that the failure of the legal representative of an insolvent company to file for insolvency within six months after the term provided by law from the onset of insolvency is punishable by imprisonment ranging from three months to one year or a fine. In addition, the Romanian Criminal Code provides that the person who, to the detriment of the creditors, counterfeits, takes away or destroys the debtor’s documents, hides a part of its assets, provides fictitious debts or indicates in the debtor's documents amounts that are not owed or, in case of insolvency, sells part of the debtor’s assets, is punishable by imprisonment ranging from six months to five years.

Subject to potential liability for breaches relating to matters up to the time of liquidation, upon liquidation, the authority of the company's directors shall be terminated (however, the directors shall remain liable for the management of the company and shall be considered as liquidators towards third parties until a liquidator is appointed). Liquidators are jointly liable to compensate losses of  the company, the shareholders or third parties resulting from the liquidators acting beyond their powers or due to faults committed during the performance of their duties.

When the cessation of payments by a company reveals a lack of assets, the court may, if mismanagement has contributed to this lack of assets, decide at the request of the trustee, the public prosecutor, or even ex officio, that the debts of the company are borne in whole or in part, with or without joint and several liabilities, by all or some of the directors.

In the event of legal redress or liquidation of a company, a director may incur personal liability if they have:

• exercised an independent professional activity, civil, commercial, artisanal or agricultural, either through an intermediary or under the cover of the company masking their actions
• disposed of the credit or property of the company as their own property, and
• abusively pursued, in their personal interest, a loss-making operation which could only lead to the company's cessation of payments.

Directors are under a duty to take into account the interests of the company’s creditors when the company is insolvent or nearly insolvent. It is advisable for directors to seek personal professional advice to avoid taking actions increasing their liability exposure to the company’s creditors.

Directors may be personally liable for the payment of debts if they knew, or ought to have known in all the circumstances that the company was trading wrongfully / fraudulently under sections 238 and 239 of the Insolvency, Restructuring and Dissolution Act 2018. Liability for wrongful trading can be avoided if the director can satisfy the court that: they had acted honestly; and that having regard to all the circumstances of the case, the director ought fairly to be relieved from personal liability. In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

Please see What are directors' other key obligations?

Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or reckless trading.   This may result in criminal liability (including the possibility of a fine or imprisonment) as well as personal civil liability for any loss incurred by any other person as a result of such reckless trading.

Directors' liability may also exist in case of insolvency proceedings of the company and becomes particularly serious if the insolvency is classified by the judge as “guilty of fraud” (concurso culpable), which means that the insolvency was caused or aggravated by the wilful misconduct (dolo) or gross negligence (negligencia grave) of the company’s directors (including de facto directors). In this case, the directors may be declared liable for the damages caused, and it could lead, under certain circumstances, to them being responsible for covering the shortfall in assets.

Insolvency as such does not trigger personal liability for the directors. However, directors who knowingly or negligently allow a company to carry on trading when it is, or becoming, insolvent may be held liable for fraudulent or wrongful trading. The directors may also be held liable for failing to prepare a balance sheet for liquidation purposes.  

Personal liabilities can be avoided if the director is able to show that they took every step they ought to have taken in accordance with the requirements imposed by the Swedish Companies Act, including the preparation of a balance sheet for liquidation purposes and convening a first and a second general meeting for liquidation purposes. See further the section "What are the key general duties of directors?".

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency.  Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading.  These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties.  Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors.  In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

In the event of cessation of payments, and when the company is subject to a collective procedure, it will be necessary to refer to the rules specific to the company. When the judicial settlement or bankruptcy reveals a lack of assets, the court may, at the request of the judicial administrator, the trustee in bankruptcy or one of the creditors, decide that the debts of the company will be borne, in whole or in part, with or without joint and several liability and up to the limit of the amount designated by the court, by the manager(s) or any de facto manager. The court may also prohibit the convicted person from managing the company or carrying out a commercial activity for a period of time determined in the judgment.

This action must be commenced within three years of the judgment which announces the judicial settlement or the bankruptcy.

An action for the payment of liabilities may also be brought against a manager. If the company's assets are insufficient, the manager is liable to bear part or all of the company's liabilities. The manager's liability is engaged without the need to prove fault, as a presumption of fault applies to the manager as soon as the company is in suspension of payments. In order to be exonerated from liability, the manager must provide proof of their diligence, prudence and loyalty in the exercise of their powers.

On a company’s insolvency, directors are required deliver up all the property of the company and disclose the details of disposal of any company property to the liquidator. Failure to do so is an offence.

In cases of voluntary winding up, directors are required to make a declaration of solvency indicating that they have made a full inquiry into the affairs of the company and have formed the opinion that it will be able to pay its debts in full within a year from liquidation. A director who makes a declaration of solvency without reasonable ground commits an offence, and the law presumes that there was no reasonable ground if the company does not pay its debts in full within the period stated in the declaration.

Onshore UAE

On insolvency, a director may face potential civil liability where an LLC's funds are insufficient to repay 20% of creditor liabilities. The court may order the manager to contribute to the company's losses and the court has wide discretion in relation to the terms of the order the director to contribute to the LLC's losses.

With regard to events leading to insolvency, a potential criminal liability may arise and directors may face up to five years imprisonment and a fine amounting to AED1,000,000 where they engage in any of the following acts:

• Hid all or some of the company's books and records, or destroyed or amended those books and records with the intent to cause prejudice to the creditors.
• Embezzled or concealed any part of the company's assets.
• Declared/acknowledged debts that were not due from the company while being aware of that fact, whether the declaration was in writing, verbally or in the accounts or they refrained from submitting evidence or clarifications while being aware of the outcome of such inactions.
• Obtained preventive composition or restructuring (within the meanings of the Bankruptcy Law) for the company by way of fraud.
• Made false declarations concerning the subscribed or paid-up capital, distributed fictitious profits or seized bonuses exceeding the amount set out in the law, the company's memorandum of association or articles of association.

Dubai International Financial Centre

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency.  Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading. These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties. Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors. In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency.  Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading.  These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties.  Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors.  In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency. 

Directors are generally not personally liable for obligations of the corporation, even in the event of its insolvency.  In such circumstances, however, the corporation’s creditors, as the residual beneficiaries of the company, are authorized to sue the company’s directors derivatively for breach of fiduciary duty. Employees may also sue directors for unpaid wages in certain states.

According to the Insolvency Act No. 9 of 2017 a director who makes a written declaration knowing that the company does not satisfy the solvency test commits an offence and is liable to a fine on conviction.

Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading.  These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties.  Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors.  In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.

In terms of the Insolvency Act, additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. 

Directors or managers who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable by a court.  This exposes the director to liability to contribute to paying off the debt incurred by the company.  

Liability for insolvent trading can be avoided if the director can satisfy the court that they had no knowledge of the transaction and that they did not participate with the handling of the accounts of the company or believed that the debt could be paid off.