The Duty of Directors in Protecting the Interests of the Creditors - Research Paper Example

As a strategic way of protecting the creditors from losing a large sum of money that was granted to the borrowers, the main purpose of liquidating an insolvent company is to expand the pool of asset that can be distributed to the creditors.Up by 56%, as compared to the first quarter report in 2008, the Insolvency Service statistics revealed that there were 4,941 compulsory liquidations and creditors’ voluntary liquidation throughout England and Wales during the first quarter of 2009. This figure is very alarming considering that the number of compulsory liquidations during the first quarter of 2007 and 2005 was only 3,113 and 2,900 respectively.

As soon as a company enters liquidation, the corporate directors can be held personally liable and obliged to pay back a portion of the company’s debts equal to the amount of company’s asset that was lost due to directors’ conduct. (See Appendix I – Company Liquidations in England & Wales between the First Quarter of 1999 to 2009 on page 46)Limited Liability Act 1955 was the first Act in the UK that made it possible for corporations to take advantage of the benefits of limited liability.

Under the modern principle of Limited Liability Act 1955, the shareholders will still be held liable directly to the creditors only for the unpaid portion of their shares but not to the extent that the shareholders would lose all of their personal wealth in paying back the company’s debts. In other words, directors and business owners can still take advantage of a limited liability partnership or LLP as protection from the creditors.