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When is a company director personally liable?

Under UK law, a company has a separate ‘legal personality’ to its directors and shareholders. Essentially, this means that companies exercise rights and powers, and are subject to obligations and liabilities.

Usually, a company will be liable for its actions, as opposed to the persons controlling it. This is known as the ‘corporate veil’. However, in certain circumstances, the courts have the power to ‘pierce’ the corporate veil and fix liability on company directors. In these situations, directors are no longer afforded the protections of the corporate structure.

This regularly occurs in the following circumstances:

Fraudulent/Wrongful Trading

If a company becomes insolvent, a director may be found to be personally liable if there has been fraudulent trading or, more commonly, wrongful trading.

Fraudulent trading occurs where a director of a company dishonestly continues business with intent to defraud its creditors, or for any other fraudulent purpose. Wrongful trading occurs where a director ought to have known that the company was insolvent and unable to pay its debts, but continues to trade regardless.

Deceit/False Misrepresentation

A director may also be held personally liable to a creditor if they make a false representation, or intentionally deceive on behalf of the company.

In such cases, creditors can make a claim directly against directors who are the ‘controlling mind’ of a company, and who:

  • sign a contract which expressly misrepresents the company’s credit worthiness; and
  • are fully aware that the company would not be able to fulfil its obligations under that contract.

 Misfeasance

Directors have a duty not to misapply company funds i.e. use for the wrong purpose or in the wrong way. Nor should they retain or misapply company property, or breach their duty of trust when dealing with company money.

If it becomes apparent during the insolvency process that a director has breached these duties, then the court could order the director to repay the money, restore or account for the money or property with interest, or even compensate the company.

Disqualification

Where there are concerns about a director’s conduct, or fitness to be a director, the courts have the power to make a Disqualification Order against that person. This means they cannot – without the permission of the court – directly or indirectly:

  • be a director of a company in any way, or
  • be concerned or take part in the promotion, formation or management of a company.

The Order will include a specified timeframe for the disqualification, lasting between two and 15 years.

If you are a director, contact us today and we can advise on the risks that you may face in terms of personal liability. Alternatively, if you are trading with a company where an issue has arisen and you would like to make a claim against its directors, we would be happy to advise you.

Find out more about our Commercial Litigation department Contact us
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