Summary
- Directors of limited companies in the UK are generally not personally liable for company debts due to the principle of limited liability.
- However, they can become personally liable in certain situations, such as breaching directors’ duties, giving personal guarantees or engaging in wrongful or fraudulent trading.
- Courts may also “pierce the corporate veil” in exceptional cases, holding directors personally responsible for company actions where there is fraud or misuse of the company structure.
- This guide explains when company directors may be personally liable for business owners in the UK, prepared by LegalVision, a commercial law firm that specialises in advising clients on disputes and corporate governance.
- It provides a practical explanation of key risk scenarios, including insolvency, legal claims and breaches of duty.
Tips for Businesses
Do not assume limited liability always protects you. Avoid trading while insolvent, comply with directors’ duties and keep proper records. Be cautious when giving personal guarantees. Seek legal advice early if your company faces financial difficulty or disputes to minimise personal exposure.
A company director is generally protected by limited liability, meaning your personal assets are separate from the company’s debts. However, this protection is not absolute, and you can be personally liable if you breach your duties, act improperly or are directly involved in wrongdoing. For your business, this creates significant risk, as personal liability can arise in disputes, insolvency or where courts “pierce the corporate veil” in cases of misconduct. This article explains when company directors can be held personally liable and how to manage that risk.
What is Personal Liability?
Personal liability is when your own personal finances are affected as a result of the company’s debts or legal issues. Generally, directors in limited liability companies will not be personally liable for their company’s financial loss.
Company directors do have certain responsibilities, however. For example, the Companies Act 2006 outlines that directors must:
- promote the success of the company for the benefit of shareholders;
- manage conflicts and legal issues appropriately;
- use their own judgement when making decisions; and
- exercise reasonable care, skill, and diligence.
If a director breaches any of these responsibilities, they may sufficiently aggravate an individual to litigate against them. This could mean that you get sued as a result of the way you operated within your company.
Can Courts Ever Ignore Limited Liability?
While limited liability is a fundamental principle of company law, there are rare instances where courts may set it aside. This process is known as “piercing the corporate veil”. But what exactly does this mean for you as a company director?
Piercing the corporate veil refers to situations where courts disregard the separate legal personality of a company and hold its director(s) personally liable for the company’s actions or debts. This legal concept is applied in exceptional circumstances, typically involving fraud, impropriety or when the company structure is used as a mere facade to conceal actual facts.
Situations that might lead to piercing the corporate veil include:
- using the company to evade legal obligations or liabilities;
- conducting fraudulent activities through the company;
- treating the company’s assets as personal property; and/or
- deliberately undercapitalising the company to avoid potential liabilities
UK courts are generally reluctant to pierce the corporate veil. They recognise the importance of limited liability in encouraging entrepreneurship and business growth. However, this reluctance does not mean it is impossible.
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Why Would Someone Want to Sue a Person Instead of a Company?
In some instances, an individual bringing legal action might want to target a person rather than the company. This can benefit the person bringing the action in certain circumstances. For example:
- the legal issue is with a company director rather than with the corporation;
- the company no longer exists, and so cannot be liable; or
- the company has already defended a legal claim, so the litigant wants to try to sue a director instead.
If you are sued in your personal capacity as a director, your personal assets and finances will be at risk.
On What Grounds Could I Be Personally Liable?
There are a number of ways in which an individual can bring a legal claim against an individual. As a company director, certain circumstances might also mean that you are liable for company debts.
For example, if you have given a personal guarantee to secure a business loan, then you will be liable to pay from your bank account if the company is unable to pay in the long term. Similarly, if you have entered into a shareholders agreement where you have agreed to provide security for a company debt, then you will also be personally liable.
This is a common way for small business owners to receive debt to finance their operations at its early stage, and you should be aware of any personal guarantees that you have granted since you began your business journey.
Further, a company director could end up owing money to Her Majesty’s Revenue and Customs (HMRC) if they overdraw a current account. This can happen if the director withdraws dividends while a company is financially struggling because the tax rate on those dividends will be higher than normal. Not realising this could mean that you are personally liable to HMRC.
What if the Company is Insolvent?
If your company becomes insolvent, your primary responsibility will shift from your shareholders to your creditors. This means that you have to prioritise creditors above all else. If you fail to do so, you could be in breach of parts of the Insolvency Act 1986.
An important provision of the Insolvency Act is the rules of ‘wrongful trading’. Wrongful trading occurs when a company director fails to prioritise their creditors’ interests when a company is insolvent. This usually happens because the company director does not realise that they are breaking the law.
Fraudulent trading, on the other hand, is when a company director is acting knowingly. Both types of trading can entail personal liability for company debts on behalf of the company director.
On the whole, it is a good idea to know your exact responsibilities and status of your company if you are a company director. In some instances, you may also want to insure yourself against any potential personal liability in the form of legal action or company debts.
This fact sheet outlines how your business can manage a dispute.
Key Takeaways
As a company owner or director in England and Wales, you will want to make sure that you are familiar with the scope of your liability. Being part of a limited liability company or limited liability partnership usually means that you are not liable for company debts or legal action. However, you could be liable if a claim is brought directly against you, or if you are found to have breached your responsibilities under the Companies Act or the Insolvency Act.
If you are concerned about your personal liability, our experienced disputes lawyers can help determine which pathway is best in your situation as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A company director might be held personally liable for company debts in several situations. This can occur if, for example, the director has provided a personal guarantee for a company loan or credit. Another instance is if the company was set up or operated with the intention of carrying out fraudulent activities or avoiding already existing liabilities.
As a company director, if you provide a personal guarantee for your company’s loan, you become personally responsible for that debt. This means that if the company fails to repay the loan, the lender can demand payment directly from you, and if you are unable to pay, the lender has the right to sue you personally to recover the debt.
Wrongful trading occurs when you continue trading while insolvent and worsen creditor losses. Courts can order you to contribute personally to company debts if you act unreasonably
Yes, courts can disqualify directors if they engage in unfit conduct, such as breaching duties or mismanaging a company. This prevents them from acting as a director for a specified period.
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