Acting in breach of a disqualification order can lead to personal liability for future company debts. And this extends to those knowingly acting on the instructions of someone already disqualified. Our team can help advise you if you face these types of claims.
Where an individual is disqualified from acting as a director then an added remedy exists for creditors of the company (and indeed the company itself) against the director so acting in breach of his/her disqualification.
This personal liability for the creditor’s debts is frequently overlooked by creditors but is a claim that can be made against any director who is in breach of their disqualification (a fact easily available from Companies House) regardless of whether a company is trading or has been placed into insolvency proceedings.
Who is liable?
Generally all directors will be liable for “relevant debts” of a company in the following circumstances:
- S/he has acted in contravention of a disqualification order or a disqualification undertaking.
- S/he has acted as a director whilst an undischarged bankrupt.
- S/he has acted as a director whilst not paying a county court Administration order.
- S/he has acted on instructions provided by a disqualified director.
- S/he has acted on instructions provided by an undischarged bankrupt.
As can be seen from these last points, a director need not have been disqualified but – where they act on instructions of a director who is disqualified (and who is acting as a shadow director) – that appointed director may become personally liable for such “relevant debts” of creditors.
It is often the case that a disqualified director arranges for a spouse or another family member to take appointment as a director but they (the disqualified director) otherwise continues to run the company.
In these circumstances both the disqualified director and those appointed at Companies House or otherwise acting as a director (or even in the company’s management) face the risk of being made personally liable for the debts of a company.
Insolvency of company
The statutory provisions do not require the current company (from which such “relevant debts” may be outstanding) to be in any form of insolvency proceedings.
It is sufficient for a disqualified director to be acting as director (or instructing its directors) to support such a claim. However, in reality this is only relevant where the company is refusing to pay or appears likely to be entering into insolvency proceedings.
Extent of Liability
The director(s) liable for a creditor’s debts under this statutory provision will be personally liable for all of the company’s outstanding debts which were incurred whilst the prohibited activities occurred.
So, where a director is disqualified, none of the debts arising prior can be claimed under this provision.
Otherwise, in respect of debts occurring whilst the prohibited activities occurred, where the company has paid creditor debts then it is arguable that the company may have claim against the director for contribution towards these trading costs.
In addition to such sums claimed, a director will also be liable for the legal costs of such proceedings, if issued at court.
Who can claim for relevant debts?
This claim is a remedy for creditors.
Whilst the grounds for such a claim will refer to a company’s “relevant debts”, it will only be those creditors who bring such proceedings which will be considered (and so not all of the company’s debts will fall within such a claim).
As stated above, it is only those debts arising when the prohibited action occurred (i.e. when the disqualified director was either acting as director of a company, in its management or instructing directors in the management of the company) that may be subject to such a claim.
Directors of insolvent companies often face claims by the company’s liquidator. We discuss liquidator claims generally here.
However, a liquidator may seek to bring such a claim for the company’s relevant debts under this provision.
This is generally not available to the liquidator in most circumstances, but a liquidator can issue proceedings against a director where the company has paid (or part paid) any part of the “relevant debts” for which that director would otherwise be liable to pay under this section.
At Francis Wilks & Jones we can advise on and assist directors in defending such claims or alternatively advising and assisting a creditor in bringing such proceedings. Please call any member of our director services team for your consultation now Alternatively email us with your query and we will get back to you.