Personal Liability for Directors

June 1, 2020 By: 1st Choice Incorporations

Officers of a limited company usually comprise the director(s) and company secretary (if one is appointed). Every company must have at least one director. Although becoming a director is nowadays very common, and for the vast majority of directors who act and intend to act properly throughout their term of office will not give rise to any personal issues, all individuals acting as a director should be aware of what might happen if something goes wrong.

Directors are initially appointed by the shareholders and can subsequently themselves appoint additional directors up to any limit set by the articles of association. Day-to-day management of a company is delegated to the directors by its shareholders.

The decisions of the directors are taken collectively by the Board of directors. A director cannot act as a director on his/her own unless only one director has been appointed. Decisions are either taken by majority vote at board meetings or by the signing by all the directors of a written resolution.

Ordinarily, directors and company secretaries are not liable personally for breach of contract as long as they are acting in the interests of the company in good faith. However, this is not to say that they can never be held personally liable. If there is a statutory breach involved this raises the implication of failure to comply with their duties and therefore the risk of a claim for breach of contract. One must also remember that directors can be held liable in respect of certain unlawful acts.

In certain cases, a company director can be held personally responsible for certain debts of a limited company that is encountering financial difficulties or insolvency. A court can require directors to contribute to debts if they shouldn’t have allowed a business to continue trading (wrongful trading). Any fraudulent trading or misfeasance can also result in directors becoming personally liable for a company’s debts, as can issues involving pensions or personal guarantees.

Wrongful trading

Company directors have an ongoing duty to protect any creditors. This means that if they allow their company to continue trading despite financial problems, which look like they will lead to insolvent liquidation, they will be deemed to have contributed to the eventual losses and could be held personally liable to make good debts to creditors.

If a director is aware (or should be aware) of financial difficulties, they need to step in and try to take action. Resigning at this point will not be enough to avoid potential future liability; they need to have taken steps to protect the interests of the company and its creditors. Board minutes that record attempts by a director to rectify problems or minimise losses are invaluable.

Phoenix Syndrome

The Phoenix Syndrome refers to the situation where a company director of an insolvent company becomes involved in the running of a new company with a similar name. Sometimes businesses attempt to continue to trade by forming a new company where a previous company has gone into liquidation. A director in this position can be held liable for any debts of the old company.

Misfeasance

Misfeasance occurs if a director has breached any of their fiduciary duties. Examples include allowing preferences (any transaction that puts a creditor of an insolvent company at an advantage that they would not have enjoyed as a result of the liquidation process) or transactions at undervalue (any transaction that appears to contain a significant imbalance).

When else can a company director become liable for debts?

If there was any attempt to defraud creditors or other types of fraudulent trading, directors can be held personally liable for debts. Furthermore, they need to be careful about pension deficits or any personal guarantees they have given in their role as a director.

A director may also be held personally liable

• for a fine if the company does not comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008 and fails to make the trading disclosures required under those Regulations (Regulation 10 of The Companies (Trading Disclosures) Regulations 2008);
• on contracts signed by him/her purportedly on behalf of the company before its incorporation (section 51 of the Act);
• if he/she acts in the management of the company while disqualified or acts on the instructions of someone whom he knows to be disqualified (section 15 of the Company Directors Disqualification Act 1986);
• if he/she has been served with a contribution notice by The Pensions Regulator on the grounds that he/she has been party to, or knowingly assisted in, an act or failure to act one of the main purposes of which was to remove or reduce the requirement or ability of an employer to pay a debt due under section 75 of the Pensions Act 1995 on the winding up of a pension scheme;
• for damages if he/she makes a fraudulent or negligent misrepresentation in the course of negotiating a contract between the company and a third party;
• under the criminal offence of making a false statement as to the affairs of the company with the intent of deceiving shareholders or creditors of a company (section 19 of the Theft Act 1968);
• for imprisonment (up to 10 years) or a fine if he/she is knowingly party to the company carrying on its business with intent to defraud creditors of the company or of another person or for any fraudulent purpose (section 993 of the Act);
• under a contract if he/she fails to make it clear that he/she is contracting as an agent of the company and not personally;
• to a third party for damages for breach of an implied warranty of authority if he/she concludes a contract on behalf of the company but exceeds his/her authority in so doing and the company is therefore able to set the contract aside.

A number of statutes contain provisions stating that if a company commits a criminal offence, a director is also guilty of the offence if it is proved to have been committed with the consent or connivance of, or to have been attributable to any neglect on the part of, the director.

Author: Charles Ndoro

• Directors