Summary
- Company directors in England and Wales are generally protected by limited liability, but personal liability can arise where a director breaches duties under the Companies Act 2006, provides a personal guarantee, engages in wrongful or fraudulent trading under the Insolvency Act 1986, or where courts pierce the corporate veil in cases of fraud or impropriety.
- Wrongful trading occurs when a director fails to prioritise creditors’ interests once a company is insolvent; fraudulent trading involves knowingly acting to defraud creditors – both can result in personal liability for company debts, and liquidators can pursue directors for these claims even without a functioning board.
- Directors should be aware that personal liability can also arise from preferential payments made before insolvency, overdrawn director’s loan accounts, and breach of fiduciary duty claims brought by the company, shareholders, or a liquidator.
- This article is a plain-English guide to personal liability for company directors in England and Wales, prepared by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on corporate governance, director duties, and commercial disputes.
Tips for Businesses
Keep a clear record of all personal guarantees you have granted and understand the extent of your exposure under each. Monitor your company’s financial position closely – if insolvency is foreseeable, take legal advice immediately to avoid wrongful trading liability. Avoid treating company assets as personal property. Consider directors’ and officers’ liability insurance to protect against personal claims arising from your role.
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A company director is generally protected by limited liability, meaning your personal assets are separate from the company’s. However, this protection is not absolute, and you can be personally liable, putting your personal assets at risk, if you breach your duties, act improperly or are directly involved in wrongdoing. For you, 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 and assets 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 the company’s financial loss.
Company directors do have certain responsibilities, however. For example, the Companies Act 2006 outlines that directors must:
- act within their powers;
- 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 the company. In more complex company structures, with multiple directors, it is also possible for the company, acting by the other directors, to bring a case against you, for losses caused by your misconduct.
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, when the company structure is used as a mere facade to conceal actual facts, or where a company is incorporated to allow the person(s) behind it to evade legal obligations, such as non-compete provisions, if these are drafted narrowly.
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;
- the company has already defended a legal claim, so the litigant wants to try to sue a director instead; or
- the company director used the company fully within their control to do an act they’re prohibited from doing themselves.
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.
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 declares dividends while a company is financially struggling. 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.
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.
Other Instances of Personal Liability
In certain circumstances, the company can also sue you for breach of duty, seeking compensation for losses caused by misconduct. Such claim requires a sufficient number of directors in office to pass a board resolution authorising the action. If there are not enough directors for a quorum, shareholders may need to appoint more directors. Alternatively, an affected shareholder may bring the claim on the company’s behalf.
If the company enters insolvent liquidation, a liquidator can bring a claim against you on behalf of the company, even without a functioning board. Liquidators commonly pursue directors for breach of fiduciary duties, misappropriation of company assets, or failure to exercise reasonable care and skill.
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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
In what situations might a company director be held personally liable for company debts?
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.
How can personal guarantees affect a director’s liability?
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.
What is wrongful trading and why does it matter?
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
Can directors be disqualified for misconduct?
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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