An Overview
We are regularly consulted by shareholders and directors regarding alleged misbehaviour by co-directors or shareholders.
And if there is a liquidation the Liquidator is bound to investigate how directors ran the business and personal liability may become a real issue.
Liquidators will always look to see if there is liability and they can claw back monies as a regular part of the process.
GENERAL RULE
As a general rule claims for wrongdoing by a company should be levelled against the company not the directors.
This is because a company is a separate legal entity from its members. SALOMAN V A SALOMAN & Co Ltd [1896].
PERSONAL LIABILITY
The protection above is known as the veil of incorporation but it is far from absolute.
Directors were ordered to pay creditors for wrongful trading and malfeasance - WRIGHT V CHAPPELL [2024].
There, they had to pay £110m personally.
It is the principle and it shows directors can have personal exposure and not always rely on the veil of incorporation.
COMMON PITFALLS FOR DIRECTORS
Here are some of the ways directors can be held personally liable:
WRONGFUL TRADING & MISFEASANCE
Even if directors did not know but just should have known that the company would fall into administration or liquidation their duty to the company switches to a duty to creditors.
Every step must be taken to minimise loss to creditors and if not taken the directors can be personally liable.
Personal liability also arises for misfeasance if they breach their duty to act in the best interests of the company. For example, transactions at an undervalue or unauthorised or for personal use.
BREACH OF DIRECTOR DUTIES
It’s not only about finance.
These are the 7 duties the COMPANIES ACT 2006 places on directors.
Act within powers;
Promote the success of the company;
Exercise independent judgement;
Exercise reasonable care skill & diligence;
No conflict of interest;
No benefits from 3rd parties;
Declare interests in transactions;
If breached the company can sue and some breaches are a criminal, not civil offences. Directors are exposed to fines, disqualification even prison.
PERSONAL GUARANTEES
Often required by banks or lenders or on big contracts. If the company fails to meet its obligations it is often easy to go against the director personally.
COMPANY ADMINISTRATION
Directors have a duty to ensure the company meets its statutory obligations. Examples are filing confirmation statements, annual accounts, notifications of change of officers, registered office, persons with significant control, special resolutions and more.
If a company fails to file when and where required it can lead to personal liability.
Late or inaccurate filings can result in fines penalties whilst recklessly delivering false or misleading information is a criminal offence not civil and can lead to prison.
PRACTICAL STEPS
Be aware of your director’s legal duties.
Appoint someone to deal with filing as a regular commitment.
Document decisions including why a particular decision is in the best interests of the company. (The test here is subjective so it is important to show your thinking if you want to steer clear of problems.)
And take legal advice early.
ALEXANDER BUSINESS LAW SOLUTIONS are lawyers for business and amongst other things, advise directors on personal liability as well as minority and majority shareholders who may have been unfairly prejudiced.