When can directors be held personally liable for a company’s actions or omissions?
Senior corporate lawyer at Ignition Law, Simon Engelsman, recently led a great online discussion about Limitation of Liability. It explored the various ways in which directors of limited companies can be found personally liable for actions carried out on behalf of companies. Here, we note the key highlights from this session, focusing on the circumstances in which courts will “pierce the corporate veil” (i.e. look beyond the limited liability offered by company structures).
“Sham” transactions
In 2013, the courts established the “concealment” and “evasion” principles, which can result in directors facing personal liability if their company, on their direction, enters into “sham” or fraudulent transactions in order to conceal money or evade obligations. In other words, if directors sanction transactions for improper purposes, they may well face personal liability in respect of the consequences.
When can directors be held personally liable by HMRC?
HMRC has the power to hold company directors personally liable if they repeatedly fail to keep a company’s tax affairs up to date, although in practice this tends to be a last resort. Directors are usually only at risk in respect of deliberate, neglectful or fraudulent actions or omissions in very specific circumstances (for example, where a director has deliberately failed to pay the required amount of income tax via PAYE to HMRC in respect of their own salary or the salaries of family members).
Personal liability in connection with fraud
Moreover, if an individual commits the statutory offence of fraudulent trading, they may face a fine and/or imprisonment for up to 10 years, provided they were knowingly complicit with actions pursued with the intention to commit fraud (including the intention to defraud creditors).
Directors may also be personally liable if they dissolve their company whilst it remains indebted to creditors, whether naively or deliberately. To that end, the Secretary of State now has the power where appropriate to require directors to pay compensation where those directors have dissolved their companies and in doing so, caused creditors to suffer a loss.
Personal liability in connection with misleading contractual counterparties
In addition, personal liability may follow where a director knew their company was insolvent, but still induced another party to enter into a contract that subsequently resulted in that counterparty incurring a loss. For example, one director faced liability after promising to pay a supplier for goods ordered, despite knowing the company was insolvent (in this case, the court found that the director’s signature on the letter promising payment constituted a fraudulent misrepresentation).
It’s always important to ensure that representations made before and during the contracting stage are – and remain – accurate throughout, as directors have previously been held personally liable for misleading contractual counterparties (and the courts have taken a robust approach when calculating damages in such circumstances).
The law has also evolved to prohibit a director from exploiting the good will of an insolvent company. For example, the law prohibits a director from using a company name that is so similar to the name of a previously insolvent company that creditors of that insolvent company could be misled into believing that the insolvent company was still trading.
Liability in connection with company insolvencies
It’s worth mentioning that the Insolvency Act allows the courts to hold directors personally liable where directors have breached their “fiduciary” duties (e.g. where they have misapplied funds, given preferences, entered into transactions at undervalues, breached their directors duties, and so on).
Directors can also be held liable under this act if they knowingly permit a company to continue to trade in an insolvency situation with the intent to defraud creditors, or fail to wind up the company where there is no reasonable prospect that the company can avoid insolvency (subject to limited exceptions). In such circumstances, the court can order the relevant directors to personally contribute to the company’s assets.
How else can directors be held accountable?
Historically, directors found guilty of misconduct could be disqualified for up to 15 years. However, since 2015, directors who are disqualified may also face a “director disqualification compensation order”, which requires them to pay financial compensation to mitigate the loss that they have allegedly caused the company.
Simon Engelsman
Senior Corporate Consultant Simon Engelsman has almost 30 years of experience in advising on secured lending and corporate and individual insolvency.
His expertise includes: Contentious and non-contentious aspects of secured lending including compliance and documentation issues, recovery and enforcement considerations and professional negligence and fraud claims on behalf of mortgage lenders. Simon has also acted as an expert witness on matters of Consumer Credit, property related disputes and insolvency matters on behalf of insolvency practitioners, creditors and debtors with the emphasis on commercial litigation, including white collar crime and directors disqualification.
Simon is a member of the Institute of Credit Management and The Insolvency Lawyers Association. Apart from providing in-house seminars to various clients, he is a regular speaker for a variety of trade and educational organisations.
If you would like to discuss limited liability or the personal liability of directors, please contact
Simon Engelsman. If you would like to attend one of our future sessions discussing limitation of liability or other legal matters, please contact Tammy Evans.
