Personal Liability Risks during Insolvent Administrative Entity Strike Off
Insolvent administrative strike off exposes directors to personal liability for corporate debts, misfeasance clawbacks, tax arrears, and disqualification.
Illegal Distributions
Meaning
Financial distributions to shareholders that violate statutory capital maintenance rules are classified as unauthorised returns of capital. Illegal distributions occur when a company pays dividends or returns capital without having sufficient distributable reserves to cover the payment. These payments undermine the security of creditors by reducing the assets available to meet the company’s liabilities.
Distributable Reserve
Financial statements must confirm the existence of realized profits before any corporate distribution is authorized. The determination of whether a payment constitutes illegal distributions relies on the latest relevant accounts, which must show accumulated realized profits exceeding accumulated realized losses. Payments made on the basis of interim accounts that do not comply with these rules also violate corporate law.
Director Liability
Directors who approve a payment without verifying the availability of distributable profits face serious consequences. The board members are personally liable to repay the company the full amount of the illegal distributions unless they can prove they acted with reasonable care. This obligation is owed directly to the company, meaning a liquidator can enforce the recovery for the benefit of unpaid creditors if the firm enters insolvency.
Shareholder Restitution
Recipients of these payments are also subject to recovery actions under specific legal conditions. A shareholder who received illegal distributions must refund the money if they knew, or had reasonable grounds to believe, that the payment was made in breach of the law. This knowledge test is easily satisfied in the case of close-knit family companies or institutional shareholders who have access to the internal financial records of the business.
Consequently, the company has a direct right to reclaim the funds to restore its balance sheet to the correct level.