As a director of a Limited Company you have many duties including exercising reasonable care, skill and diligence and declaring any interest in a proposed transaction or arrangement. You also have a duty to the shareholders and creditors of the Company.
These rules are set out in the Companies Act 2006 and are relatively extensive.
That said, as a general rule a director is not held personally responsible for the company’s debts.
As the title suggests, the liability of a Company is limited. This protection is not afforded to partnerships that are not limited or to sole traders. This limited liability protection together with potentially better tax provisions is why a lot of accountants will recommend businesses be structured this way.
However there are some circumstances where directors may be liable and I set out three common occurrences:
A director will be held personally liable if they give a personal guarantee. A personal guarantee is a legal agreement that states the director of the company will be held liable to pay the Company’s debt should the Company fail to pay the same or become insolvent.
Some guarantees may also require the giving of security by way of a charge over property or shares.
It is therefore essential that a director is fully aware of any imposition of personal liability for acts taken by the company such as receiving lending facilities e.g. a bank overdraft or loan or when signing a commercial lease with a landlord.
Personal Warranties or Assurances
A director may be held responsible for personal assurances given which amount to a warranty or guarantee on behalf of the Company where the other side have placed reliance on these representations.
This is more difficult to establish so will largely depend on conduct, the individual circumstances and whether such representation could be reasonably believed to be personal to that director.
Directors may be further held personally responsible to the Company for actions taken prior to its insolvency. This is not a personal liability to pay the Company’s debts but would be a matter for any insolvency office holder to pursue. The hope being to recover monies from delinquent directors which would be used towards discharging the Company’s debts in the insolvency including the creditors as a whole.
The office holder may take action against the director for misfeasance (misusing your power as director); preferential payments (payments made to creditors before insolvency proceedings to benefit that creditor to the detriment of remaining creditors); transactions at under value (a company entering into a transaction with a party for consideration at a significantly lower value) and/or fraud (deceiving for personal gain).
How can directors seek to protect against personal liability?
- Where possible, never sign a personal guarantee;
- Always carefully read the Terms & Conditions of other companies when contracting on behalf of the Company. Some terms and conditions seek to impose a personal liability for the signatory and whether it is binding or not is likely to end in a potential claim and an incursion of legal costs;
- Regularly balance your accounts and make sure you do not pay dividends whilst insolvent;
- Do not pay regular suppliers over and above the Inland Revenue. As a director you will be aware the Company needs to pay tax so don’t forget to allocate for it;
- Do not give verbal or written assurances unless it is clear that this is given as a company director; and
- Make sure that every letter, email and business card states the name of the company for which you act as director, the address of the registered offices and your position as a director.
- Additionally, it is important when responding to emails and letters, to try to avoid referring to ‘I’ when talking about the Company and instead refer to ‘we’ or “the company” to avoid confusion.
- If you retire or are removed as a director make sure that all suppliers, landlords, the tax office and lenders are notified and that all guarantees that might have been given during this role are also addressed and transferred from that point onwards to any incoming or remaining directors only.
- You may also want to take out appropriate insurance to protect you as a director against any claims of this nature.
If you have any concerns prior to committing to provide a personal guarantee always seek independent legal advice and if a claim is threatened after one is given don’t bury your head in the sand but address it with an expert legal adviser as soon as possible.
The quicker you get advice the more options are usually available.