Understanding directors personal liability

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Normally a Director of a Limited Company is not personally responsible for its debts, having the protection of limited liability.

However, where a Director of an insolvent company has failed to carry out his/her duties or is guilty of wrongdoing, this protection can be removed leaving the director at risk of disqualification or being sued.

During the last twelve months there have been several changes to the rules which could increase the risk a director faces when a company goes into liquidation. The period of time in which the Secretary of State has to issue Directors Disqualification proceedings has increased from two to three years and the matters which the Court will consider to determine unfitness has widened. The Secretary of State now has the power to apply to Court for a Compensation Order to be made against a disqualified director where that directors actions have caused an identifiable loss to either a specific creditor or to creditors generally. For example, failure to pay VAT or PAYE for a significant period of time might be something that is pursued using a Compensation Order with any award being paid direct to HM Revenue & Customs. Although due to the timescales involved it will be some time before the first Compensation Order is made, directors should be aware that any future action that they may be subject to will relate to their conduct since 1 October 2015 and therefore they are potentially at risk now.

A further change that could increase the risk for directors is that a Liquidator can now assign to a third party claims that previously could only be exercised by the Liquidator. For example, claims such as preferences or transactions at undervalue. Previously a Liquidator may have decided, for commercial reasons, not to pursue claim. Now it is possible to assign a claim to a third party, such as a creditor, who may be particularly interested and motivated in pursuing the action.

What all this means is that the potential risk for a director of an insolvent company has increased and to mitigate that risk it is more important than ever to take advice from an Insolvency Practitioner. Taking advice sooner rather than later will not only limit the personal risk a director faces, by ensuring that they carry out their duties correctly and do not inadvertently commit an office, but will also increase the prospects of the business or company being restructured and saved.

Christopher Brown is a Licensed Insolvency Practitioner and partner at Hart Shaw LLP.