With great power comes the risk of personal liability

Business owners regularly use companies as a medium for trade in order to take advantage of their separate legal identity; the gospel being that this will afford them protection by ring-fencing their personal assets. This benefit is offset by the increased administrative responsibility required from companies in order to protect the public.

While traditionally a shareholder’s liability is limited to any amount remaining unpaid on shares, directors are subject to more stringent regulations and could find themselves held personally liable for breaches of their duties. While these can be tailored using the articles or in service contracts, underlying these are duties imposed by common law and statute. These are:

General Duties:

• To act within powers
• To promote the success of the company
• To exercise independent judgment
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare an interest in a proposed transaction or arrangement

Specific Duties:

• To disclose their interest in an existing transaction
• Not to defraud creditors
• Duties upon insolvency 
• Bribery

These duties are owed to the company and breach could make the director personally liable and may lead to the director being disqualified.

Furthermore, it is not uncommon when dealing with a bank or a landlord that a personal guarantee will be required in order to secure a certain facility or property, especially if the company is relatively new or has limited assets. If given, rather than piercing the corporate veil and reaching for the director’s personal assets, these guarantees would usually make the director jointly and severally liable, regardless of the actions of the intermediate company.

Please contact Sing Li, Solicitor on 01582 514 356 or by email on [email protected] if you would like to discuss the matters raised in this article or any other aspect of commercial law.