Limited Companies and Directors Liabilities
27th August 2015
So, you’re the director of a limited company and things aren’t going so well. You decided to close the business, but that’s ok as the debts are the company’s, not yours, right? Unfortunately, this isn’t always the case – there are circumstances where company directors can be held personally liable for company debts.
The most obvious example of where a director is personally liable is in respect of personal guarantees (PGs). In these instances, it is not unusual for the creditor not to wait for dividends in a liquidation/CVA etc, but instead wholly rely on the PG. The liability is limited to a specific debt only and usually subject to a set maximum (detailed on the PG document itself).
For the purpose of this article, let us assume we are looking at company liquidations. Liquidators will examine the conduct of the company directors up to the point of liquidation and can bring claims against company directors under Insolvency Act 1986. Let’s look at the three key areas in turn:
- Fraudulent Trading – under section 213 of the Insolvency Act 1986, fraudulent trading is when a director carries on the business of the company with the intent to defraud the creditors of the company. In these instances, the liquidator can apply to the court for the director to make payment personally for an amount equivalent to the loss the company suffered as a result of his/her actions.
- Wrongful Trading – under section 214 of the Insolvency Act 1986, wrongful trading is when a director knew (or should have known) that there was no reasonable chance that the company could avoid an insolvent liquidation, and he/she failed to take steps to minimise potential losses to the company’s creditors. Like fraudulent trading, the liquidator can apply to the court for the director to make payment personally for an amount equivalent to the loss the company suffered as a result of his/her actions.
- Misfeasance – under section 212 of the Insolvency Act 1986, misfeasance is when a director has misapplied, retained, or become accountable for any company property. Claims for misfeasance can be brought by the liquidator, Official Receiver, creditors, or a “contributor” such as a shareholder, and can extend to third parties who knowingly assisted in the misfeasance (including professional advisers). In these instances, the misfeasance claim would be up to the value of the misappropriated property.
How do you as a company director ensure you do not fall foul of these potential claims? The Companies Act 2006 sets out the key duties of a director which is principally to act in the best interest of the company at all times and exercise reasonable care, skill, and diligence. In addition, a director must act in good faith and not put himself/herself in a position where their personal interests conflict with that of the company. As a Limited Company is a separate legal entity, a good analogy is that being a company director is somewhat similar to being the legal guardian of a child in many respects.
If you do have any concerns, I would always recommend being open and honest in the “pre-appointment” stage with your potential company liquidator. If this is not possible, speak to a good insolvency practitioner, lawyer, or insolvency specialist who may be able to assist.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.