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FAQ / Are there circumstances in which the directors or officers of a company can be made personally liable in respect of its insolvency?


Ordinarily, the mere fact of an insolvency should not result in liability to the directors, officers or managers of an insolvent company since business failures occur for a variety of reasons and are a fact of life in a free market economy. However, under tax and wage payment statutes, the failure to pay certain types of taxes or employees’ wages may result in personal liability for officers or managers responsible for making such payments. In addition, directors, officers and managers may be held personally liable if the actions of such persons either caused or worsened the debtor’s insolvency or were otherwise inappropriate given the insolvency or probable insolvency of the debtor at the time the actions were taken. To be personally liable in such cases, however, the actions taken by the directors, officers or managers of a debtor must generally be found to constitute or be the result of a breach of certain state law duties owed to the company such as the duties of due care, loyalty and good faith. Directors, officers and managers are not held personally liable for mere errors in business judgment or if the business strategy they pursued was unsuccessful as long as they acted on an informed basis, in good faith and in the honest belief that the actions taken were in the best interests of the company.

 




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