It’s a well-known fact that shareholders of private limited companies do not normally have any personal liability for the debts and obligations of the company.
But what about the directors?
In this article, experienced Corporate & Commercial Lawyer Paul Longland outlines whether company directors have any personal liability.
Can a director be personally liable for company debts?
There has been a steady process over some years of increasing the potential liabilities of directors for their actions or omissions both for criminal matters and for civil liabilities or damages.
What are the latest developments in company director liability law?
Last year the former directors of the collapsed construction group, Carillion, were fined a total of £870,000 by the Financial Conduct Authority for issuing misleading financial information about the company.
When is a director personally liable?
There are now multiple situations when a director can be personally liable:
The Companies Act
Under some sections of The Companies Act, directors can be personally liable for making sure that the company complies with the rules for a limited company. If they don’t comply, they can be liable to pay fines or penalties
In addition, directors can also be liable if they don’t follow requirements for the conduct of the company itself. For example, if they don’t call shareholders’ meetings when asked or fail to give shareholders certain information where requested.
Other legislation
Aside from The Companies Act, there’s now a wide range of other legislation that has gradually introduced potential liabilities for fines or even imprisonment for directors.
Examples include:
- Health and safety legislation,
- Data protection (GDPR),
- Competition law – e.g. cartel offences, and
- The financial services sector, where directors can be prosecuted following company defaults.
Insolvent Trading
There are provisions under insolvency legislation where directors can be made personally liable:
- For debts incurred by the company with third parties if the director knew the company couldn’t avoid liquidation.
- If the director carries on a new business using the name of the old company following insolvency, known as a ‘phoenix’ company
Related: What is a phoenix company sale?
Other situations
- Breach of duty – where directors breach their duty, personal claims for damages from the company itself or shareholders can arise
- Acting on behalf of the company – A director can be personally liable to a third party if they enter into a contract but do not make it clear that they are acting on behalf of the company and not in a personal role.
- Personal Guarantees - Directors, especially of smaller companies, may be expected by third parties such as bankers, finance companies or landlords to take on liability by giving a personal guarantee.
- Disqualification proceedings - If a director acts as a director whilst disqualified, they can be made personally liable for company debts.
Related: What makes a strong business contract? Our advice
When can a director be disqualified?
A director can be disqualified from acting as a director if they breach legislation related to running the company, are convicted of a criminal offence, act fraudulently in winding up proceedings or are deemed ‘unfit’.
Related: Personal guarantees and independent legal advice
How can company directors protect themselves from liability?
To avoid and mitigate these risks, directors can:
- Act carefully and reasonably when dealing with company matters or transactions.
- Keep up to date financial information and management accounts and ensure the company is properly funded.
- Keep company and personal finances and matters separate.
- Consider taking out directors’ liability insurance, which is widely available.
- Be aware of and follow any restrictions on the directors’ authority in the company’s articles of association, which form the constitution and rules for the company.
- Where necessary, take professional advice, especially on financial and tax matters or if the company appears to be approaching insolvency;
- Where a personal guarantee has to be given, consider entering into an agreement with the other shareholders of the company so that the liability is shared by them, if the guarantee is called.
Related: What is a shareholders agreement and what should it include?
Related: Mitigating and tackling Shareholder Breaches
Tailored advice on director liability
At Frettens, our specialist Corporate & Commercial Team are one of the largest and most experienced in the region.
We would be happy to provide advice and/or answer any questions you may have on director liability, whether you’re a director yourself, shareholder or any other stakeholder.
Please don’t hesitate to give us a call for a free initial chat on 01202 499255, or get in touch by filling out the for at the top of this page.
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