Director must pay back over half a million pounds
We are often asked about how and when company directors can incur personal liability in relation to the business they manage.
It is generally understood that one of the main reasons for running a business through a limited company is the ‘limited liability’ this provides. Broadly speaking, this means a company’s obligations are the responsibility of that company alone and the directors do not have any personal liability.
However, there are numerous exceptions to this general principle. In a recent judgment, the High Court ordered a former director to pay compensation of £559,484 to creditors of the company he had been running. The order was made under a compensation regime added in 2015 to the Company Directors Disqualification Act 1986, which adds to the list of ways in which directors have been made personally liable for the debts of a company.
In this case, the company in question was a broker of fine wines. The company went into liquidation and the director was disqualified for 15 years from acting as a director.
He had transferred £559,484 from the company to another company he controlled without having any legitimate business purpose for doing so. This money included cash that belonged to the first company (i.e. revenue from its wine sales), as well as money owed to customers, on whose behalf the company had sold wine to other wine merchants.
Because the director had taken a large amount of money from the company for apparently no good reason, it is perhaps not surprising that he was ordered to pay it back.
However, this is the first time that an order has been made under this particular piece of legislation and so it gives an indication of how the courts will implement this relatively new way for directors to be found personally liable.
Personal liability for directors
With that in mind, it is worth summarising some of the ways in which company directors can be made personally responsible for a company’s debts:
- Guarantees and indemnities – an obvious example of directors incurring personal liability is when they have expressly agreed to do so. Lenders to a company will often require that at least one of the company’s directors takes personal responsibility for the company’s debts by entering into a guarantee and indemnity.
- Breach of directors’ duties – every company director owes certain duties to the company as a matter of law. These include, among others, duties to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, and to avoid conflicts of interest. A director who has breached any of his/her duties can be ordered to pay damages or compensation.
- Certain insolvency situations – when a company is struggling to pay its debts and formal insolvency proceedings are on the cards, the directors have a duty to act in the interests of the company’s creditors as a whole. Directors can be held personal liable to those creditors in various situations, including:
- where the business has been operated fraudulently; or
- where the director knew or ought to have concluded there was no reasonable prospect that the company would avoid liquidation/administration; or
- as in the case referred to above, where the director has been disqualified as a result of conduct that caused loss to creditors.
- Breaches of certain environmental, health and safety or anti-corruption legislation – for example, where a company commits a health and safety offence with the “consent or connivance” of a director or the offence is attributable to the director’s neglect, then the director can be prosecuted. Similarly, in certain circumstances where a company is held to be in breach of the Bribery Act 2010, a director can be personally liable if he/she “consented to” or “connived in” in the corruption.
The list above is not exhaustive. It simply illustrates some of the ways in which company directors can be – and have been – made personally liable for debts and other costs relating to their businesses.
If you would like to know more about the ways in which directors can be personally liable, and ways to minimise the risks, please contact Tim Lucas on 020 7288 4753 or by email at TimothyLucas@boltburdon.co.uk.
You can also contact one of the other solicitors in our Corporate and Commercial team here.