There are many advantages to running a business by way of a limited company or a limited liability partnership.. But also significant risks - which can ultimately lead to personal claims against directors. Our brilliant team has helped 100's directors since 2002. Let us help you too.
The main benefit of running a company is that it is a separate legal entity from the business owners, so that apart from specific circumstances, directors and shareholders are only personally liable up to the value of their investment in the company.
However, the privilege of limited liability brings with it responsibilities for those who are tasked with running the company, namely the directors.
Directors are subject to a range of duties under various legislation and governance codes. If they fail in these duties then the corporate veil may be pierced, and the directors can be subject to personal liability.
Solvent company duties
Directors’ primary duties when a company is solvent are to the shareholders of the company as a group, although there are other parties that directors also have a responsibility to, for example Her Majesty’s Revenue & Customs for tax returns and payment, and Companies House for Annual Returns.
When a company is solvent, because the duties are generally to the company it follows that the company can enforce any breach.
- the company therefore might bring a civil action against a director for a breach of duty, and the court has a wide discretion on the relief or compensation that can be granted, depending on what the breach is;
- a director might be ordered to personally pay damages or compensation if the company has suffered loss, restoration of the company’s property, a rescission of a contract, or an account of profit made by the director. It very much depends on the breach.
What can a director do if in breach of duty in a solvent company?
It may be possible for a director to take out insurance against breach to protect their personal position, or to have the protection of an indemnity from a third party for specific transactions. It is also possible for a director to ask the company to ratify a breach if they are willing.
Alternatively, a director may wish to defend a claim against them. Professional advice should be taken by a director wishing to avail themselves of any of these options. If you are in this position, contact our team at Francis Wilks & Jones for a discussion on your options. We have many years of experience defending company directors in these sorts of claim, and can help.
Personal liability in an insolvent company situation
When a company reaches insolvency, which is defined in insolvency legislation as either being balance sheet insolvent or being unable to pay its debts as and when they fall due, then the duties are owed not to the company but to the company’s creditors.
Once a company goes into liquidation or administration or faces another insolvency event, then the insolvency office holder appointed over the company may wish to take action against a director for breach of duties with the aim of recovering monies back into the company for the benefit of creditors.
There are a wide variety of claims that an office holder may make against a director, depending on the extent of the misconduct. For example,
- if a director continued to trade the company and increase damage to creditors knowing that there was no reasonable prospect of avoiding insolvency, then they may be personally liable for the increase in damages to the creditors during that period. This can be quite significant.
- if property is transferred to another party for significantly less in value than its worth, this can lead to a claim. This is classed as a transaction at an undervalue, and the director and/or the beneficiary may have to repay the undervalue amount to be used for the benefit of the company’s creditors.
A court has wide powers in these proceedings to restore the position and compensate the company’s creditors, depending on the misconduct found.
Professional advice should be taken as soon as a claim is received, or there may be severe consequences for a director. If you are in this position, contact our team at Francis Wilks & Jones for a discussion on your options. We have many years of experience defending company directors in these sorts of claim, and can help you.
Directors’ disqualification proceedings
As well as being held personally responsible for financial recompense for particular allegations brought by an insolvency office holder in an insolvent company situation, a director may also be subject to director’s disqualification proceedings for that misconduct. If found guilty a director can be disqualified as a company director for anywhere between 2 and 15 years, depending on the misconduct.
Traditionally in directors’ disqualification proceedings, directors were not asked to repay any monies lost as a result of the allegations brought against them. However, recently the law changed so that directors who are disqualified may face a compensation order claim at the same time. The amount of the compensation order will depend on the allegation. For example, if one of the allegations is a failure to pay taxes, it is likely that some or all of the lost tax revenue may be reclaimed from the director personally.
At Francis Wilks & Jones we act for director on all aspects of breach of duties and have many years of success defending claims against directors for personal liability and disqualification. If you find yourself subject to a claim either by your company, or an insolvency office holder, or by the Insolvency Service for directors’ disqualification, it is essential that you act quickly in taking advice as soon as possible. One of our senior team members at Francis Wilks & Jones will get back to you as soon by return to discuss your options and the next steps available to you.