Apr 24

Personal liability – so much for limited liability

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 6 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths.  The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors.  It is not a substitute for taking specific legal advice on a particular set of circumstances.

6. Personal liability – so much for limited liability

The ability to set up a company encourages entrepreneurs to start new business ventures by ring fencing liabilities to the new company entity and not exposing the individual to personal financial risk. In effect, the company is treated as solely responsible for its trading with the individual directors merely acting as its agents.

However, it would be wrong to assume that directors can never be personally responsible for the liabilities of the business which they have created.

Here are ten examples of where limited liability evaporates away leaving the director personally exposed:

1. Primarily, setting up the company in the first place – it is quite usual to enter into contracts and incur liabilities in anticipation of the company being incorporated. However, if those start up liabilities remain unpaid you can be found to be liable to pay even though it was contemplated that the company would pick up the cost.
2. Secondly, once the company is set up remember to make it clear to anyone you deal with that you are now trading as a company. For example, if you do not present a business card or letterhead with your company details displayed, any customer will be entitled to assume they are dealing with you personally in the event of a problem and hold you directly responsible.
3. Make sure you are fully aware of your new responsibilities to the company and your fellow directors is the third point. If you exceed your job description or authority, you could be liable to a third party or even be exposed to a claim by the company itself for exceeding your limits.
4. Fourthly, some banks or suppliers may not lend or supply to a newly established company and will require you to give guarantees or some form of security. Make sure you are comfortable with the amount you could be personally liable for potentially many months or years later when the business could have taken a turn for the worst.
5. Fifthly, keep up with your paperwork for Companies House. A failure to ensure that the company complies with its statutory obligations to file annual returns, accounts and other key documents can leave you at risk of not only a fine but also a criminal record.
6. Point six, remember the contractual arrangement you may have reached with your shareholders when the company was first incorporated, possibly in a shareholders’ agreement, in which you may personally have agreed to contribute to the assets of the company or provide security for the company’s debts if needed.
7. Point seven, if you are also a shareholder as well as a director, it may be that you hold shares which are not fully paid up. As a result, you could be later required to pay up outstanding amounts in accordance with your share subscription and contribute to the assets of the company.
8. Beware of the overdrawn director’s loan account is point eight. It is frequently the case that benefits paid to directors are classified as a loan to the director. However, a loan is just that, a loan and a request for repayment can become an unwelcome request.
9. Being caught by a misrepresentation is the penultimate point. For example, encouraging a supplier to supply goods to you on the basis that they would be paid quickly when in fact the company is not in a position to pay any time soon. In such circumstances, the supplier could argue that he would not have dealt with the company if it was not for your misrepresentation and pursue you for payment directly.
10. Finally, remember that for the purposes of health and safety legislation and many other areas of statutory regulation, a director can in some cases be found to be personally liable for any wrong doing of the company.

These are just ten examples before we even considering the personal liability which may present itself in the event of the insolvency of the company.

A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

1. You have been appointed – but what kind of director are you?
2. The top 5 things directors do wrong – including the consequences
3. The Board of Directors cannot agree anything
4. Shareholders – the director’s ultimate master
5. Directors’ loan accounts – the best overdraft you can get?
6. Personal liability – so much for limited liability
7. Becoming a non-executive director – the risk free option?
8. Wrongful trading – the risks facing directors when the company is insolvent
9. The wound-up company – it’s not all over yet for directors
10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide.   Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666. Raworths is based in Harrogate, North Yorkshire.

Published on 4 April 2024