Directors' liability – when do you become personally liable for the company's debts?

A limited company being unable to pay its debts does not automatically mean the board, the general manager or the shareholders have to pay out of their own pockets. Personal liability can still arise where a director acts intentionally or negligently and that causes a loss to the company, a shareholder or a creditor.

The general rule: the company owes the money

Shareholders are as a general rule not liable to creditors for the company's obligations. If a limited company goes bankrupt owing a million kroner to suppliers, those suppliers cannot simply demand the million from the owners or the directors personally. There are, however, several separate grounds on which personal liability can arise.

When can a director become liable in damages?

Section 17-1 of the Companies Act allows liability in damages where a director or the general manager has intentionally or negligently caused a loss to the company, to shareholders or to others in that role. So it is not enough that the company did badly, that a bill went unpaid, or that the company went bankrupt. There also has to be something the person can be blamed for, and the act or omission has to have caused the loss. See the Companies Act, chapter 17, on liability in damages.

The board has to follow both equity and liquidity

The company must at all times have equity and liquidity that are adequate for the risk and scope of its business, and the board has to keep itself informed about the company's financial position. That means the board should react when the bank account empties, large tax liabilities fall due, supplier debt grows, trade receivables are not paid, or the company cannot finance the coming payroll or operations. Where that has already led to serious payment problems, see Cannot pay tax and VAT – payment plan or bankruptcy?.

When is the duty to act triggered?

Although the Act requires both adequate equity and adequate liquidity, the express duty to act in section 3-5 is tied to the equity. Where the equity is assumed to be lower than is adequate, the board must deal with the matter immediately. Within a reasonable time the general meeting must be given an account of the company's financial position, and the board must propose realistic measures where the equity has to be strengthened. Where there are no realistic measures, the board must propose that the company be wound up. A serious shortage of liquidity is at the same time highly relevant to the board's other duties and to whether continuing to trade is sound.

When does continuing to trade become dangerous for the board?

There is no particular date and no single ratio at which personal liability automatically begins. It can be sound to keep trading for a period even where the finances are weak, provided there are realistic prospects of saving the business. The risk rises when continuing to trade becomes clearly unsound – typically where there is no longer a realistic hope of avoiding bankruptcy and the company keeps taking on new obligations. A risky position also arises where management keeps ordering goods and services without giving the other side the information it needs about an extraordinary payment risk. That does not mean management has to warn every supplier the moment the finances weaken – the assessment is specific to the case. Where a creditor has already petitioned for bankruptcy, see Served with a bankruptcy petition – what now?.

The board minutes matter when the finances fail

When the company runs into financial difficulty, the board's assessments should be documented. The minutes should show what the board actually had in front of it: interim accounts, liquidity, expected customer payments, financing or investor discussions, the measures decided, and when the position would be reviewed again. Good minutes do not automatically avoid liability, but they can be important evidence later. Equally, a recorded dissent does not automatically free a director from liability.

The whole unpaid debt does not automatically fall on the board

Even where a director has acted negligently, the creditor has to show what loss that conduct actually caused. So it is wrong to think that because the company owes NOK 500,000, the board owes NOK 500,000 privately. Liability requires a specific link between the conduct and the loss.

Personal guarantees and withheld tax have their own rules

An owner or a director can be personally liable because they have voluntarily guaranteed the company's debt. That liability is contractual, not directors' liability. A company can therefore go bankrupt without the director having done anything blameworthy, while the bank can still demand payment personally under a personal guarantee. Unpaid advance tax deductions should also be kept apart from ordinary directors' liability – see Advance tax deductions not paid – what now?. Unlawful distributions have their own rules in the Companies Act on repayment and on liability for participating in them. The limited liability in an AS, and what it does not cover, is set out in Sole proprietorship or limited company Housing co-operatives and jointly owned properties have their own rules on the board's financial responsibility – see The board's financial responsibility in a housing company

This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.

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