If you’re a company director experiencing financial distress, personal liability for debts may be a worry. While a company shields its members and directors from most liabilities there are certain areas you aren’t protected from.
Director’s liability is a complex issue
Delving into director’s liability isn’t for the fainthearted. It’s a complex area with many intricacies that can be difficult to navigate alone.
As a director, you don’t simply owe a duty to the Company to act in good interests, there are also other areas where personal liability may become an issue. You may also need to account for any monies received, or to indemnify the Company against any losses incurred.
When does personal liability come into play?
Some of the ways a director can enter personal liability territory include but are not limited to:
- The company does not comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008, and fails to make trading disclosures required under those regulations.
- If they act in the management of the company while disqualified or acts on instructions from a disqualified director.
- They signed relevant documents on behalf of the company before its incorporation.
- If they have previously been a director of a company that has gone through insolvent liquidation and then carries on the business under a name or similar name used by the insolvent company.
- If they have been served a contribution notice by the Pensions Regulator.
- If they have made a false statement relating to the affairs of the company, with the intention of deceiving shareholders or creditors.
- If they have acted with the intention of making a gain or causing a loss to another person through disclosing dishonest information.
- If they are party to the company carrying on its business with the intention of defrauding creditors.
- Under contract when directors fail to make it clear they are acting on behalf of a company.
- Third party damages for entering into a contract whereby they do not have the authority to do so
- If the director engages in wrongful or fraudulent trading
- If they run a series of businesses that become insolvent, also known as phoenixing.
What is phoenixing?
Phoenixing, or phoenixism, are terms used to describe the practice of carrying on the same business through a series of companies where each one becomes insolvent. Every time this happens, the insolvent company’s business (but not its debts) is transferred to a new ‘phoenix’ company.
Naturally, companies can fail, be dissolved or face financial difficulties for a range of reasons aside from misconduct. As such, the law allows the individuals to set up new companies to carry on similar activities, as long as they are not personally bankrupt or disqualified from acting in the management of a limited company.
However, when a company is wound up, insolvency law restricts who can reuse the company’s registered name and trading names. Unless privy to an exception, anyone who has been a director for a year before the company went into liquidation is banned from taking part in the management of another business with the same name. This ban lasts for five years and also covers similar sounding names.
Director’s liability – what to do if you’re worried about personal liability
Director’s liability is an intricate topic which often needs expert help to navigate. If you’re a company director worried about liabilities, or facing insolvency, contact reputable insolvency practitioners who can assist. You’ll be able to access expert advice and be helped to avoid liabilities where possible – reducing stress in the process.