Director's Duties & Risks
As a general rule the debts of the company remain with the company and its directors are not personally liable. However, if a director fails in his duty to act in the interest of creditors, or acts in breach of legislation, there is a risk that he may become personally liable for some of the company’s debts. Areas of risk that should be considered by directors include the following:
Breach of Fiduciary Duty - Section 212 of the Insolvency Act 1986
If a director misapplies, retains or becomes accountable for any money or other property of the company or is guilty of any misfeasance or breach of any fiduciary duty or other duty in relation to the company, he may become personally liable to pay compensation.
Fraudulent Trading - Section 213 of the Insolvency Act 1986
If a director allows the company to continue trading with the intent to defraud creditors the director will face both criminal and civil liability.
Wrongful Trading - Section 214 of the Insolvency Act 1986
If a director allows the company to continue trading in circumstances where he should have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, he may be made personally liable for some of the company’s debts.
Reuse of Company Name - Section 216 of the Insolvency Act 1986
If a director of a company that has gone into liquidation reuses the company name, or a similar name, within five years he faces potential personal liability and possible criminal prosecution. Names may be reused in certain circumstances but as this is a complex area you should seek professional advice at an early stage.
Transactions At An Undervalue - Section 238 of the Insolvency Act 1986
This is where the company enters into a transaction where the consideration received is significantly less than the value given or is for no value at all. For example selling a car worth £10,000 to a relation for £1,000 would be clearly a transaction at an undervalue. A director party to such a transaction could be made personally liable to restore the position.
Preferences - Section 239 of the Insolvency Act 1986
A preference is where something is done which puts a creditor into a better position in the event that the company is placed into liquidation than if that thing had not been done. It is usually where a particular creditor has been paid in priority to other creditors. If a director allows a preference to take place or is the beneficiary of a preference, he could become personally liable.
Other areas of risk that a director should consider include the taking of deposits knowing that orders can not be fulfilled, the failure to submit annual accounts or returns to Companies House and the failure to keep proper books and records.
Contravention of all these areas may lead to not only personal liability but will also be taken into account when assessing the directors fitness to be a director and may lead to disqualification proceedings under the Company Directors Disqualification Act 1986.
Directors should therefore take early advice to ensure that they do not act in breach of the duties placed upon them.