Directors’ Personal Liability

Most directors of a limited company know that it is a solemn responsibility, and that they can have some personal liability. 

However, few people bother to look into or understand what that actually means and assume that the risks are more theoretical than real. That is a mistake as personal liability for a director comes in many guises. The below is a summary of some to watch out for.

General Directors’ Duties

Directors (and in some cases shadow directors) owe duties to the company itself.  Many of the key duties are enshrined in the Companies Act 2006, and are as follows:

  • the duty to act within powers;
  • the duty to promote the success of the company;
  • the duty to exercise independent judgment;
  • the duty to exercise reasonably skill, care and diligence;
  • the duty to avoid conflicts of interest;

the duty not to accept benefits from third parties; and the duty to declare interests in proposed transactions or arrangements.

As the above duties are owed to the company only the company can enforce them, not just a random person. For example, the board of directors may take an action against a director for breach of duty on behalf of the company. Alternatively, a derivative claim may be brought, which is a claim brought by one or more of the members of a company, on behalf of the company.

Some of the possible consequences of such a claim by the company are an order against the director for damages or compensation, an account of profits made by the director, an injunction or recission of a contract.  This could in theory be a pretty hefty sum of money that the director has to personally fine. These are also possible consequences for a claim for breach of any of the equitable duties held by a director, such as breach of fiduciary duty.

In certain circumstances, a director can be protected from liability for breach of the general duties by a policy of insurance or an indemnity, however this must be a qualifying indemnity and a general provision/indemnity exempting liability from negligence, default, breach of duty or a breach of trust is void. The best thing to do is have an insurance policy, but also try not to breach any duties!

Companies in financial difficulties

Many directors have heard of the concept of trading whilst insolvent, but what does this actually mean? Where a company is in financial difficulty, and formal insolvency proceedings become likely, a director is obliged to act in the interests of the company’s creditors as a whole. This means trying to preserve the value of the company in order to maximise the likely return for creditors, rather than continuing to trade as usual. This duty survives the appointment of a liquidator or administrator and should not be taken lightly.

Directors also have potential personal liability under the Insolvency Act 1986 for misfeasance, fraudulent trading, wrongful trading and voidable transactions. In addition to personal liability to compensate/repay monies, fraudulent trading is also a criminal offence with up to 10 years in prison as a penalty.

The Finance Act 2020 makes is possible for directors, and others, to be made jointly and severally liable for the tax liabilities of a company in situations of tax avoidance and evasion, repeated insolvency, or where a penalty has been issued for facilitating avoidance or evasion.

Criminal Liability

Some examples of where a criminal liability may arise are:

  • Director Disqualification – If a person is disqualified from acting as a director, and then operates as a director in breach of the disqualification order, that person commits a criminal offence and is personally liable for the debts of the company.
  • Insider Dealing.
  • Misleading Statements – an offence under the Financial Services Act 2012.
  • Bribery – an offence under the Bribery Act 2010.
  • Health & Safety – employers have health & safety obligations and if an offence is found to have been committed with the consent or contrivance of the directors or to be as a result of negligence of the directors, then the directors as well as the company may be prosecuted.
  • Environmental crime – liability may arise where directors if they cause or knowingly permit environmental damage.
  • Offences under the Fraud Act 2006.
  • Offences under the Data Protection Act 2018.

The above is only a summary, and unsurprisingly this is a complex area.  Acting responsibly, ethically, within the law and in accordance with the duties enshrined in the Companies Act is an excellent start for any director. If you are concerned that you may have personal liability/you are unsure if a proposed action may expose you or the company; or if you are a company seeking to bring a claim, then specialist legal advice should be sought.