The concept of company’s having limited liability and a separate legal identity is not new, in fact was recognised by the UK House of Lords in the 19th Century, notwithstanding that, it’s a concept that many company directors fail to understand.
We frequently come across cases where a company is paying for the directors personal expenses, such as mortgage or rent payments. These payments are something that liquidators must investigate, as from the Company’s position the Company hasn’t received any value for the payments and as liquidators; we are able to recover these as undervalue transactions under the Companies Act.
The recovery of these transactions often comes as a shock to shareholders and directors who feel that they are being made to pay the same expense twice; not recognising that it was in-fact paid by the company and not the director. We have recently had a case, where the payments on a director’s personal motor vehicle was direct debited from the company’s bank account, a review of these transactions concluded that the liquidators received no value for the payments and as such the liquidators sought recovery of the entire amount paid from the finance company.
More recently, and perhaps more troubling, we have come across directors of company’s we are liquidators of calling debtors of the company requesting them to pay into a new (personal) bank account. This conduct exposes the directors to potential criminal sanctions and can also lead to the liquidation costs increasing significantly, as the liquidators are still required to pursue collection of the company debtors.
Advisors, when setting up limited liability companies, should look to ensure that the directors, when accepting the role as director, understand what it means, and the responsibility that flows from that.