Directors Personal Liability on behalf of Limited Companies
Written by Simon Taylor
18th November 2023
In the UK, company directors have legal responsibilities and potential liabilities associated with their role. It's important for directors to understand these obligations and their personal liability when acting as a director.
Directors can mitigate their potential risk by staying informed about their legal obligations, seeking professional advice when needed, and actively participating in the governance and management of the company.
It's common for companies to purchase insurance for directors and officers to provide protection against personal liability claims.
Company director personal liabilities
One of the advantages of forming a limited liability company is the separation of the company's legal personality from the personal identities of its shareholders or company directors. In essence, the corporate veil creates a distinct legal entity for the company, which is treated as a separate "person" in the eyes of the law.
This separation can offer protection for the directors of a personal liability that can arise from the company's debts and obligations. However, there are a number of different circumstances in which UK company directors of limited liability companies can be held personally liable. Below we take a closer look at how personal liability can arise for company directors.
> Breach of Fiduciary Duties:
Directors owe a set of fiduciary duties to the company, including acting in good faith, promoting the success of the company, exercising independent judgment, and avoiding conflicts of interest. Breaching these fiduciary duties can lead to personal liability for the directors.
> Duty of Care and Skill:
Directors are required to exercise a reasonable level of care, skill, and diligence in carrying out their duties. If a director is found to have failed in this duty, they may be personally liable for any losses suffered by the company.
> Breach of Statutory Duties:
Directors are subject to various statutory duties under the Companies Act 2006. These include duties related to the promotion of the success of the company, avoiding conflicts of interest, declaring any personal interests in transactions, and ensuring compliance with filing requirements.
> Breach of Insolvency Laws:
If a company becomes insolvent, directors must prioritise the interests of creditors over those of shareholders. If it's found that a director continued to trade while knowing the company was insolvent or failed to take appropriate action, they may be held personally liable for the company's debts.
> Wrongful Trading:
Directors can be held personally liable if they allow a company to continue trading when there is no reasonable prospect of avoiding insolvent liquidation. In such cases, directors may be required to contribute to the company's assets.
> Health and Safety Breach:
Directors may be personally liable for health and safety breaches within the company. This includes ensuring the safety of employees and others affected by the company's activities.
> Tax Obligations:
Directors are responsible for ensuring the company complies with tax laws. Failure to do so can result in personal liability for unpaid taxes.
> Environmental Obligations:
Directors can be held personally liable for environmental offenses committed by the company. This includes failure to comply with environmental regulations and pollution control laws.
> Filing at Companies House
Directors must ensure that the company complies with various statutory obligations, such as filing annual accounts and annual returns with Companies House. Failure to meet these obligations can result in fines for the company and potential personal liability for the directors.
Understanding director’s fiduciary duties and personal liabilities
In the United Kingdom, company directors owe fiduciary duties to the company and its shareholders. Fiduciary duties are obligations of trust and loyalty that directors must fulfill in their role. The Companies Act 2006 outlines the general duties of directors, which are considered fiduciary responsibilities. The key fiduciary duties of a UK company director include:
> Act in Good Faith:
Directors must act in good faith, meaning they should act honestly and with integrity in the best interests of the company. They should not use their position for personal gain or to the detriment of the company.
> Promote the Success of the Company:
Directors have a duty to promote the success of the company for the benefit of its members (shareholders) as a whole. In doing so, they should consider various factors, including the long-term consequences of their decisions, the interests of employees, relationships with customers and suppliers, and the impact on the community and the environment.
> Exercise Independent Judgment:
Directors must exercise their powers independently. While they may seek advice, they should not be unduly influenced by external factors or the interests of particular stakeholders. This independence is crucial for ensuring objective decision-making.
> Exercise Reasonable Care, Skill, and Diligence:
Directors are required to exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the same functions as the director and the general knowledge, skill, and experience that the director has.
> Avoid Conflicts of Interest:
Company directors must avoid situations in which their personal interests conflict with those of the company. If a conflict arises, they are required to disclose it and, in some cases, seek approval from the board or shareholders.
> Accept Benefits from Third Parties:
Directors should not accept benefits from third parties that are offered because of their position as a director or because of the company's activities, unless the acceptance is authorised by the company's constitution, the board, or a resolution of the shareholders.
> Declare Interests in Proposed Transactions or Arrangements:
Directors are required to declare any direct or indirect interest they have in a proposed transaction or arrangement with the company. This declaration should be made as soon as is reasonably practicable.
These fiduciary duties are designed to ensure that directors act in the best interests of the company and its stakeholders, promoting long-term success and preventing conflicts of interest. Breaches of these duties can result in legal consequences, including personal liability for directors. It's important for directors to be aware of their fiduciary responsibilities and seek professional advice when needed to fulfill their duties effectively.
Management liability coverage
Can directors be held personally liable for company debts in a limited company?
In most cases, limited company directors are not personally liable for the company's debts. However, there are situations in which directors may be held personally liable.
> Personal Guarantees:
If a director has given a personal guarantee for a company debt, they can be held personally liable for that specific obligation. A personal guarantee is a commitment by an individual (in this case, a director) to personally repay a debt if the company is unable to do so.
> Wrongful Trading:
If a company continues to trade while insolvent and the director knew or should have known that there was no reasonable prospect of avoiding insolvent liquidation, directors can be held personally liable for the company's debts incurred during that period. This is a form of personal liability intended to prevent directors from taking excessive risks with creditors' money.
> Fraudulent Trading:
If a director is found to have been involved in fraudulent trading, where business is carried on with the intent to defraud creditors or for any fraudulent purpose, they may be held personally liable for the company's debts. This is a serious offense and can lead to both civil and criminal liability.
> Personal Liability Arising from Breach of Duties:
Directors can be held personally liable if they breach their duties or engage in conduct that results in harm to the company. This could include actions such as diverting company funds for personal use or engaging in transactions that are not in the best interests of the company.
> Director Disqualification:
In cases of serious misconduct or incompetence, directors may be disqualified from acting as directors for a specified period. Disqualification does not directly result in personal liability for debts, but it can have significant professional and personal consequences.
It's crucial for directors to be aware of their duties, act responsibly, and seek professional advice if the company is facing financial difficulties. Maintaining accurate financial records, avoiding wrongful or fraudulent trading, and seeking legal advice when needed can help directors minimise the risk of personal liability for company debts. Directors and officers insurance is a valuable cover to have in place to offer financial protection, but it does not absolve directors of their legal responsibilities.
What are UK company directors duties and liabilities with respect to the insolvency act?
Under the UK Insolvency Act 1986, directors have specific duties and responsibilities when a company is facing financial difficulties or is insolvent. These duties are designed to protect the interests of creditors and ensure that directors act responsibly during challenging financial circumstances. The key provisions related to directors' duties in the context of insolvency are primarily outlined in Sections 214 to 216 of the Insolvency Act 1986. Here are the main duties:
Wrongful Trading (Section 214):
Directors can be held personally liable if, during the course of insolvent liquidation, it is found that they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into liquidation and yet continued to trade. The court may order the director to contribute to the company's assets to satisfy its debts. The court considers not only the actual knowledge of directors but also what they ought to have known and the steps they took to minimise potential losses to creditors.
Directors can be held personally liable if, during the course of insolvent liquidation, it is found that they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into liquidation and yet continued to trade. The court may order the director to contribute to the company's assets to satisfy its debts. The court considers not only the actual knowledge of directors but also what they ought to have known and the steps they took to minimise potential losses to creditors.
Fraudulent Trading (Section 213):
Directors may be held personally liable for fraudulent trading if they were knowingly party to carrying on the company's business with the intent to defraud creditors or for any fraudulent purpose. Fraudulent trading is a more serious offense than wrongful trading and can lead to both civil and criminal penalties.
Directors may be held personally liable for fraudulent trading if they were knowingly party to carrying on the company's business with the intent to defraud creditors or for any fraudulent purpose. Fraudulent trading is a more serious offense than wrongful trading and can lead to both civil and criminal penalties.
Misfeasance (Section 212):
If a company goes into insolvent liquidation, and it appears that a director has misapplied or retained company property or has been guilty of any misfeasance or breach of fiduciary duty, the court may order the director to repay, restore, or account for the money or property.
If a company goes into insolvent liquidation, and it appears that a director has misapplied or retained company property or has been guilty of any misfeasance or breach of fiduciary duty, the court may order the director to repay, restore, or account for the money or property.
Preference Payments (Section 239):
Directors need to be cautious about making payments or transfers of assets that favor certain creditors over others before the onset of insolvency. Such transactions may be deemed as "preferences," and the court can set them aside if made within a certain period before the onset of insolvency.
Directors need to be cautious about making payments or transfers of assets that favor certain creditors over others before the onset of insolvency. Such transactions may be deemed as "preferences," and the court can set them aside if made within a certain period before the onset of insolvency.
Transactions at an Undervalue (Section 238):
Directors should avoid entering into transactions that involve the sale or transfer of company assets for significantly less than their true value, especially if the company is insolvent or on the verge of insolvency. Such transactions may be set aside by the court.
Directors should avoid entering into transactions that involve the sale or transfer of company assets for significantly less than their true value, especially if the company is insolvent or on the verge of insolvency. Such transactions may be set aside by the court.
Extortionate Credit Transactions (Section 244):
Directors should be cautious about entering into credit arrangements that could be considered extortionate, particularly if the company is insolvent. The court has the power to set aside such transactions.
Directors should be cautious about entering into credit arrangements that could be considered extortionate, particularly if the company is insolvent. The court has the power to set aside such transactions.
Directors should be mindful of these duties and take appropriate steps to protect the interests of creditors and the company in financial distress. Seeking professional advice, maintaining accurate financial records, and acting in the best interests of the company are crucial during such challenging periods.
About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.