We are conscious that not every claim or issue faced by a director has a ready made name badge - often a complex mix of factors have to be taken in to account to achieve the most favourable outcome. Our years of experience working with directors across a range of industries and business structures means we are best placed to help.
Overview – different types of claims
Directors of companies in the UK are entrusted with the shareholders’ interests in managing in developing the companies’ business in accordance with all shareholders’ wishes.
A director cannot be partisan, and certainly should not act for the majority of shareholders where any potential conflict exists (especially where they are in conflict and hold a majority shareholding).
- where a company is insolvent, a director’s duties are owed also to creditors of the company;
- any step taken to act to any potential prejudice of a company’s creditors in such circumstances (even where the company is viable and trading) leaves the potential of a claim being made against the director(s) personally for any losses to the company’s creditors as a result of any decision or action taken.
- since the beginning of the 1990s legislation has been introduced to make a director personally liable for any such prejudice to HMRC;
- as regards shareholders, if a director acts to prejudice shareholders’ interests then s/he may be liable for a breach of any shareholders agreement (to which the company should be a party to) or under the Companies Act in accordance with the legislative protection afforded to minority shareholders.
Other types of claims we advice directors on are as follows
Often where a company enters into an arrangement for the provision of finance or otherwise where dictated, a personal guarantee from the director(s) may be sought. This is most common for SMEs where bank or asset-based finance is sought.
- a personal guarantee makes the director liable, up to any limitations as set out in the guarantee documentation, for any shortfalls, losses or otherwise by the other party which is contracting with the company;
- the most common example is where a company fails and the bank has an overdraft which is then unpaid – the director may be required to meet the liability, subject to any consequential recovery by the company.
Where a director guarantees a third party’s debt (i.e. the company) then upon payment they do have a common law right to replace the lender/creditor and seek to reclaim any sums in accordance with the lender/creditor’s rights.
Piercing the Corporate Veil
Limited liability of a company (and an LLP) enables a businessman (the shareholders – who are often also the director(s) in a quasi-partnership/close company) to be protected from the risk of business. If the business fails, they should be able to walk away.
However, as with many other claims, where the director has benefited or willfully brought about such losses then the court may enable a claim to be brought against that director or the company’s shareholders in their personal capacity.
The scope of such claims cannot be listed within this article, but can include
- claims relating to misrepresentations made by that director personally to sell a product / service or engage a supplier to the company (which may be fraudulent misrepresentations where they knew that the supplier would not be paid or would suffer a loss as a result of such misrepresentations);
- or where shareholders arrange for contracts to be entered into in the company’s name with the knowledge they would never be fulfilled, solely to gain a personal advantage.
Similar types of claim arising where there are group companies, all using the same trading name and the identities are merged (perhaps deliberately) to either confuse or avoid any proceedings being brought against the directors / shareholders personally.
A creditor can also seek recovery of losses where an individual who was disqualified as a director nevertheless acted as director in enabling the investment/supply and therefore the loss incurred. There does not need to have been any insolvency of the company.
Within insolvency proceedings, a creditor may bring an action for misfeasance (or breach of the fiduciary duties owed to creditors) in a similar manner to a similar claim being brought by a shareholder, with the claimed equitable compensation commensurate to the loss suffered sought.
Common law claims – breach of trust, deceit etc
A director holds duties owed to various stakeholders including
- the public generally;
- other directors; and
As primary management they also act as trustees solely responsible for deployment of the company and its assets for the benefit of all of these stakeholders.
As a result of such trust obligations there also arise various common law obligations to treat the various stakeholders properly and not to abuse this position and ensure there is a duty of care and good conduct when a director performs his/her role.
Whilst we cannot predict every type of claim arising under this heading, at Francis Wilks & Jones we have considerable experience dealing with claims against and defences of companies, their directors and shareholders. Should you require any assistance, please contact our director services team who can discuss such matters with you.