A limited company has its own legal personality. It is distinct from its members and directors. A limited company therefore acts as a shield which protects its members and directors from many liabilities, but such protection is not absolute.
Company directors who enter contracts with bad faith can face personal responsibility. This was confirmed in the case of Antuzis v DJ Houghton Catching Services Ltd 2019. A director was also the sole shareholder of the company. He was held liable for causing the company’s breach of contract knowing breaching his fiduciary duty to the company. The case focused on the personal duties that a director has to his company. The case stressed the importance of a director to understand his statutory duties and important documents such as the company articles and the shareholder agreement.
Directors can be held liable on a personal basis when they personally guaranteed financial commitments of their limited company. This can include standing as guarantor for a bank loan. It is widespread practice for lending banks to ask a director to function as a personal guarantor. This gets round the difficulty of suing a company with limited liability. Directors should take legal advice before committing themselves to such financial obligations. A director may in this case be able to give a limited guarantee to the bank rather than an absolute guarantee.
A company must update Companies House about changes within a company such as the appointment and resignation of officers. It must also inform Companies House about the kind of the business undertakes. Directors are liable if they do not file accounts for each financial trading year. If there is failure to do so the director faces a fine of up to £5000. The accounts must be true and correct.
Insolvency Act 1986, Section 214
Under sections 214 of the Insolvency Act 1986 directors may be liable for the offence of wrongful trading. This offence is committed when a company is placed into liquidation or administration. The director at the time had knowledge or ought to have known that the company could not have avoided the insolvency situation but failed in the duty to take every possible action to avoid further losses to the company’s assets and or creditors. In this circumstance the court has the power to order the director contribute to the assets of the company. The court will apply both a subjective and objective criterion to make this decision. Therefore, some directors may be held liable in the same company, and others may not. The court will not find liable those directors who have can show they have protected the interests of the creditors.
The Companies Act 2006 sets out the duties of a director. These duties also apply to defacto directors and shadow directors. A defacto director is a person who gives the impress he is a director and is treated as by the board as a director although never being formally appointed by the board. Shadow director are persons who directs and instructs the directors.
The director’s duties are to act within the powers granted to them. To actively encourage the success of the company. To practice independent judgement. To use reasonable care, skill, and diligence. To avoid a conflict of interest. Not to accept any benefit from a third party. To always declare an interest in potential or current transactions or any arrangement with the company. The director must exercise a duty of confidentiality and look at the interest of the company’s creditors. A director breaching any of these duties can face a derivative action by a shareholder on behalf of the company. The court can order the director be held liable for such a breach and to compensate for any losses because of this breach.
Voluntary Liquidation
If a company wants to stop trading by way of a member’s voluntary liquidation, there is requirement that the directors first make a statutory declaration of solvency. They will confirm that the company can pay off its creditors within the next 12-month period. If such a statement is made falsely a director can face an unlimited fine or two years in prison. The declaration must be registered with Companies House within 15 days of being made.
A phoenix company is where a company remerges in the same of similar name after the original company became insolvent. Such companies normally have the same directors. The directors commit an offence if they use the name of an insolvent company or a similar name as this can make creditors of the dissolved company think this is the same legal entity, they had dealings with. To ensure the new company is valid and for directors to avoid this liability they must obtain a court order or supply notice to all the creditors.
The finance Act 2020
The Finance Act 2020 can allow HMRC to hold directors liable in insolvency situations. Directors can face joint and several liability for tax and penalties. The purpose of the law is to introduce liability for directors who have proven bad behaviour.
The HMRC has the power to issue notices for tax avoidance and evasion. They can investigate when a director repeatedly places his companies into insolvency. The HMRC can impose a penalty for facilitating tax avoidance and evasion. This will apply where a company begins or is expected to commence insolvency proceedings, the direct consequence which will result in the loss of tax revenue to the HMRC.
This article is for guidance only and should you need any further guidance please contact the Quest advice line for legal advice on company law matters on 01455 852028.
