Liability of a director for the debts of a limited company
A limited liability company has a separate identity to that of its directors and shareholders. The company’s acts are therefore not the acts of its directors who are only acting as the agents of the company. By accepting appointment as a director however they owe a duty to the company, its shareholders and creditors. They will have a number of statutory duties imposed by the Company Acts and if these are not complied with they could be disqualified from becoming a director, fined, or become personally liable for any loss resulting from the omission. In extreme cases they could even be sent to prison.
Although it is well established that a company’s acts are not the acts of its directors there are circumstances where a director can be held personally responsible for a company’s debts and liabilities. This can be particularly the case where a company becomes insolvent and enters administration. A director who has acted improperly and can be shown not to have acted in the best interests of the company can be held liable where:
• Company money has been used for purposes not related to the company’s business
• Company assets have been disposed of at less than market value levels
• Dividends have been paid to shareholders to which they were not entitled
• Accounts information has been falsified and creditors misled
• Taking credit which the company has no realistic chance of repaying
• Continuing to trade notwithstanding being insolvent
Furthermore a director can be held personally liable for losses arising from an act or omission that constitutes negligence.
Piercing the corporate veil.
Where a company has become insolvent, leaving unpaid debts and creditors who may have no other recourse other than to look to the directors for payment, the courts may be prepared to lift the veil of incorporation, and ignore the separate legal personality of a company.
The separate legal personality of a company will always be respected but where fraud or deliberate breach of trust can be shown the court has powers to go behind the corporate veil. The conduct of the company’s directors, managers and shareholders will be examined and if found guilty of fraud they can be held personally liable. Fraud unravels all.
The leading case is Salomon-v-Salomon which whilst confirming the principle of separate identity for a company will not allow it to be used as an instrument of fraud. Subsequent cases have shown that the Courts can be expected to lift the veil where a company is a mere cloak or sham and where it is being used to avoid legal obligations.