The starting point is that a company has a separate legal personality from its directors. Therefore, a director is not personally liable for a company’s debts, even when the company is insolvent or facing insolvency. There are, however, some circumstances where directors can become personally liable; either because they agreed to be or because of their actions. The actions of each director are assessed based on their individual conduct and whether they have breached their duties.
Director’s duties
These include:
- acting within their powers.
- promoting the success of the company.
- exercising independent judgment.
- exercising reasonable care, skill and diligence.
- avoiding conflicts of interest.
- not accepting benefits from third parties.
- declaring an interest in a proposed transaction or arrangement.
However, where directors know (or ought to know) that a company is bordering on or facing insolvency then the emphasis changes from acting in the best interests of the company to acting in the best interest of the company’s creditors.
Breach of director’s duties
If a director breaches their duties, they will need to make good any loss caused by the breach. These duties are owed to the company and, as such, only the company can bring a claim. However, shareholders and other directors may be given permission to bring a claim on behalf of the company.
If a director continues to allow a company to trade when it is insolvent or likely to become insolvent, the director could be found personally liable for wrongful or fraudulent trading.
Wrongful trading
This occurs when the director is aware, or should have known, that their company was going into liquidation or insolvent administration and continues to trade. The director should have acted in the company’s assets and creditors’ best interests to avoid any further losses. Failure to do this is a breach of their director’s duties.
Fraudulent trading
During the winding up of a company, if any company business has been carried out with the intent to defraud its creditors or the creditors of any other person for any fraudulent purpose, the court may, on the liquidator’s application, declare that anyone who knowingly carried out any business is liable to make such contributions (if any) to the company’s assets as the court thinks appropriate.
Transactions at an undervalue
Some of the other ways in which directors may be personally liable are:
- Breach of director’s guarantees.
- When a personal guarantee has been given.
- Late filing at Companies House.
- Breach of health and safety legislation.
- Tax evasion.
Where a director acts reasonably and in a proper manner in accordance with their duties and takes early action when faced with financial difficulties is unlikely to be held personally liable. However, an element of caution should be exercised.
Should you wish to discuss anything mentioned in this series please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.