This is the first in a series of three articles exploring how a director may incur personal liability in relation to their company. The second article will look at a director’s potential personal liability when a company enters into Liquidation or Administration, and the final article explores liability for a director that may occur even after their resignation.
When people trade through a company it is usually because they want to avoid personal liability should the business fail. Their belief being that any liability should be limited to the investment made by them or their shareholding.
When a company begins to trade if it needs to obtain credit, to buy supplies or materials, the director may be asked to give a personal guarantee. In such a case a director will be personally liable in the event that the company is unable to fulfil its obligations. It should also be noted that when the company is entering into any contract the director should ensure that they are signing on behalf of the company and not in their personal capacity.
Other than assuming liability for the debts of the company, as set out above there are other instances when personal liability could be incurred.
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Failure to file documents with Companies House on time
Not filing confirmation statements, annual returns or accounts is a criminal offence – and directors could be personally fined in the criminal courts.
Furthermore filing, or causing to be filed misleading, false or deceptive documents or statements can also result in directors being personally fined.
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Breaches of directors’ duties
Directors have fiduciary and common law duties (in addition to statutory duties) and if they breach these duties not only can they be removed as directors but if they profit from their breach, they can be personally liable to account to the company for those profits.
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Breach of statutory duties
The Companies Act 2006 codifies various duties for directors, that if breached can result in personal liability. Also, directors need to be aware of other legislative duties, such as Health and Safety legislation that if breached can lead to criminal prosecution and if convicted fines or imprisonment.
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Wrongdoing committed by the company at the direction of the director.
A tort committed by a company at the direction of the director can give rise to personal liability for a director. As an example, a director may be personally liable for a fraudulent misrepresentation made by them on behalf of the company.
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When the company enters Liquidation or Administration
When a company enters into Liquidation or Administration the appointed Liquidator or Administrator may bring claims against the directors. The appointed office holder will carry out investigations and these usually include looking at the conduct of the directors and their decisions in relation to the management of the company, as well as the transactions entered into by the company in the lead up to its insolvency. The investigation will look into:
- Wrongful trading.
- Fraudulent trading.
- Misfeasance or breach of fiduciary duty.
- Transactions at an undervalue.
- Fraud and misconduct related offences under the Insolvency Act 1986.
Cognitive Law have specialists who can give advice on matters relating to director’s liabilities, should you wish to discuss any issues arising from the above please contact Darren Stone on darren.stone@cognitivelaw.co.uk.
This article is not intended to be regarded as advice or to be a comprehensive guide to the claims referred to, and if faced with such claims advice should be sought.