Director and Successor Liability in Company Liquidation

by | Nov 7, 2023 | Commercial law

Introduction

Company liquidation can be a complex process, involving settling debts and distributing assets to stakeholders. During this process, questions often arise regarding the liability of directors and the potential responsibilities of a new company formed after liquidation. This article explores the legal aspects of director liability and successor liability in the context of company liquidation.

Director Liability

Directors usually have limited liability, protecting their personal assets from company debts. However, exceptions exist:

Wrongful or Fraudulent Conduct: Directors may be personally liable if they engage in fraudulent actions that harm creditors or stakeholders. This includes embezzlement, fraudulent transactions, or breaches of fiduciary duties.

Breach of Legal Obligations: Directors can be held accountable for breaches of legal duties, such as improper record-keeping or failure to file required documents.

Piercing the Corporate Veil: In certain cases, courts may disregard the corporate entity to hold directors personally liable, typically in cases of extreme wrongdoing or fraud.

Successor Liability

Successor liability addresses whether a new company formed after liquidation is responsible for the old company’s debts. Factors affecting this determination include:

Separate Legal Entity: Generally, a new company is a separate legal entity, not automatically liable for the old company’s debts.

Mere Continuation: Successor liability may apply if the new company continues the old company’s business, using its assets and serving the same clientele.

Fraudulent Intent: Successor liability may be invoked if the new company is formed to evade existing liabilities, attempting to escape old debts.

Legal Framework: The application of successor liability is governed by local laws and court precedents, varying by jurisdiction.

Conclusion

Company liquidation raises questions about director and successor liability. Directors have limited liability but may be personally liable for wrongdoing. Successor liability depends on factors like the new company’s structure and intent. Seek guidance from experienced attorneys to navigate these legal complexities and understand the implications of company liquidation in your jurisdiction. Contact an Attorney at SchoemanLaw Inc. for all your legal needs!