In the UK, director duties are governed under the Companies Act 2006. Directors may face personal liability for risks extending beyond the company, and this article will examine liabilities directors face when taking up their role.
Becoming a company director offers status and requires adherence to substantial legal obligations. The concept of limited liability protects shareholders in many circumstances however, this does not extend to directors in the same way, who can face personal liability when they breach their duties, particularly in times of financial difficulty.
Directors Duties
The Companies Act 2006 outlines several general duties that every director must maintain:
- Directors must act within their powers
- Promote the success of the company
- Exercise independent judgment
- Apply reasonable care, skill and diligence
- Avoid conflicts of interest
- Declare interests in transactions
These duties are owed to the company itself, so when directors overstep their duties, they incur personal consequences. Directors may be required to compensate the company for losses, return profits made improperly, or face disqualification from acting as a director. The same legal standards apply to all appointed directors, regardless of whether they are passive or nominee directors with reduced accountability.
Personal liability for directors increases when a company is going through insolvency. At this time, directors must prioritise the interests of creditors over shareholders. When there is no realistic prospect of avoiding insolvent liquidation, the best practice is to stop trading; if not, this can lead to wrongful trading claims. If dishonesty is involved, fraudulent trading allegations may arise.
In insolvency proceedings, a liquidator or administrator will review the conduct of directors in the period leading up to the insolvency. Poor record keeping, ignoring professional advice, or allowing debts to accumulate without a credible recovery plan call all be scrutinised.
Directors are legally responsible for ensuring the company accounts and fillings are accurate and submitted on time. Relying solely on accountants or finance teams is not a defence if information is misleading or false. Regulatory breaches such as failures relating to tax, health and safety, or data protection can also expose directors to personal penalties.
Directors can reduce risk by maintaining proper board minutes and seeking professional help early when cashflow issues arise. Demonstrating decisive decision-making is critical in defending future claims.
Ultimately, directorship entails assuming serious responsibilities. It is important for directors to understand and comply with their duties, as this is important for protecting the company and their own personal position.
At Nath Solicitors, we provide expert legal advice on company matters. If you need assistance, please call us today on 0203 983 8278 or email us at enquiries@nathsolicitors.co.uk.