Running a limited company in the UK comes with many responsibilities, but one of its core benefits is limited liability. This generally protects directors and shareholders from being personally responsible for the company’s debts and obligations. However, limited liability is not absolute. This often poses the question ‘When Can a Director Be Held Personally Liable?’.
Under certain circumstances, directors can be held personally liable for their actions, especially if they breach their legal duties or act negligently.
This article explores when a company director can be held personally liable in the UK, what situations give rise to this liability, and how directors can reduce their risk through good governance and proactive decision-making.
What Is Director Liability?
Director liability refers to the legal responsibility a company director may bear in certain situations. While limited companies are separate legal entities, UK law allows the “corporate veil” to be pierced in specific circumstances—exposing directors to personal claims.
Normally, company debts and obligations belong to the company itself, not the individuals running it. However, if a director acts unlawfully, fraudulently, or breaches their fiduciary duties, they may be personally liable for losses or penalties.
Understanding this distinction is vital for any director aiming to operate within the law and protect their personal assets.
General Duties of a Company Director
UK company directors must comply with the statutory duties outlined in the Companies Act 2006. These seven general duties are designed to ensure directors act in the best interests of the company and its stakeholders. They include:
- Act within powers: Directors must only exercise powers granted by the company’s constitution.
- Promote the success of the company: Decisions should benefit the company long-term, considering employees, suppliers, and the environment.
- Exercise independent judgment: Directors must not simply follow others’ instructions unless legally required.
- Exercise reasonable care, skill and diligence: This duty reflects what a reasonably diligent person would do in a similar role.
- Avoid conflicts of interest: Personal interests must not interfere with company interests.
- Not accept benefits from third parties: Bribes or gifts that create a conflict of interest are prohibited.
- Declare interest in a proposed transaction: Any personal interest in a company deal must be disclosed.
Failure to comply with these duties can lead to personal claims, disqualification, and financial penalties.
When Can a Director Be Held Personally Liable?
Directors may be personally liable in various legal scenarios. This section outlines the most common situations where liability arises.
1. Misrepresentation or Fraud
Directors can be held personally liable if they intentionally or negligently provide false information, either to shareholders, lenders, or regulators. This includes overstating financial figures, concealing losses, or misleading creditors. Fraudulent misrepresentation occurs when a director knowingly makes a false statement to gain a benefit.
Under the Fraud Act 2006, this can result in civil liability or even criminal prosecution. Fraudulent trading under section 213 of the Insolvency Act 1986 also exposes directors to personal liability if they carry on business with intent to defraud creditors or for a fraudulent purpose.
2. Wrongful Trading
Wrongful trading is one of the most common ways directors face personal liability, particularly when a business becomes insolvent. Under section 214 of the Insolvency Act 1986, a director can be held liable if they continue trading when they knew—or ought to have known—that the company had no reasonable prospect of avoiding insolvency.
The courts may order directors to contribute to the company’s assets to compensate creditors. Directors are expected to take timely steps, such as seeking advice from insolvency practitioners, to minimise losses once financial trouble becomes apparent.
3. Breach of Fiduciary Duties
Fiduciary duties refer to the obligation to act in good faith and in the company’s best interests. Breaches may occur if a director places personal interests above those of the business, misuses company property, or engages in unauthorised conflicts of interest.
For example, awarding contracts to a family member’s company without disclosure may result in a claim for breach. The Companies Act 2006 allows the company, shareholders, or creditors to pursue directors who act improperly. If found liable, directors may be required to repay money or compensate the company for losses resulting from their misconduct.
4. Health and Safety Offences
UK directors have legal responsibilities under health and safety legislation, including the Health and Safety at Work Act 1974. If a company neglects its health and safety duties and someone is injured or killed, individual directors may be held personally liable, especially if they failed to put adequate safety measures in place.
In severe cases, directors can face prosecution under the Corporate Manslaughter and Corporate Homicide Act 2007, leading to criminal charges and fines. Regular risk assessments, training, and documented compliance can help directors meet their legal obligations and avoid liability.
5. Environmental Law Violations
Directors may also be personally liable for environmental breaches, such as pollution, waste mismanagement, or failure to comply with regulatory permits. The Environmental Protection Act 1990 and other UK environmental legislation allow for criminal prosecution if a company commits an offence with the “consent, connivance or neglect” of a director.
This means that even indirect involvement in an environmental offence can expose directors to penalties. Fines for environmental breaches can be substantial, and directors may face disqualification or even imprisonment in serious cases involving negligence or wilful disregard of environmental responsibilities.
6. HMRC and Tax Offences
If a company fails to meet its tax obligations, HMRC has the power to hold directors personally liable in some cases. This often occurs where taxes such as PAYE, VAT, or National Insurance Contributions are deliberately withheld.
A Personal Liability Notice (PLN) may be issued if HMRC believes non-payment was due to neglect or fraud by a director. Directors can also be liable for tax avoidance schemes that are found to be abusive under the General Anti-Abuse Rule (GAAR). To avoid this, directors must ensure that the company’s tax affairs are accurate and compliant at all times.
7. Unlawful Dividends
UK company law restricts the payment of dividends to situations where sufficient distributable profits exist. If directors approve dividends unlawfully—i.e., when there are insufficient retained earnings—they may be required to repay them.
This liability applies even if the director relied on inaccurate financial statements. The Companies Act 2006 makes it clear that directors are responsible for ensuring dividends comply with company law and accounting rules. Proper due diligence and regular consultation with accountants can help directors avoid this issue and ensure they remain compliant when declaring dividends.
Real-World Examples and Case Law
Understanding how personal liability applies in practice can help directors recognise the seriousness of their duties. In the case of Re Produce Marketing Consortium Ltd (No 2) [1989], the court held directors personally liable for wrongful trading, emphasising their duty to creditors once insolvency became likely.
Another notable case, Secretary of State v Neale [1995], resulted in director disqualification due to repeated breaches of duty, including unpaid VAT and trading while insolvent. These cases highlight how personal liability arises not only from criminal actions but also from poor judgment and inaction.
How to Protect Yourself as a Director
Directors can take several steps to reduce the risk of personal liability. First, maintaining accurate and up-to-date financial records is essential. This ensures transparency and helps detect issues early. Second, directors should seek professional advice from solicitors, accountants, or insolvency practitioners, particularly when the company faces financial pressure or legal uncertainty.
Third, obtaining Directors’ and Officers’ (D&O) Insurance can provide cover for legal costs and compensation claims arising from certain actions. Finally, if the business’s position deteriorates significantly, stepping down as a director may be necessary to protect personal interests—though timing and conduct remain important.
Director Liability During Insolvency
When a company becomes insolvent, directors’ duties shift to focus on the interests of creditors rather than shareholders. This change significantly increases the risk of personal liability. Directors must act promptly, avoid favouring one creditor over another, and refrain from incurring new debts the company cannot repay.
Failing to do so could result in accusations of wrongful trading or preference payments, which the courts can penalise. Engaging an insolvency practitioner at the earliest opportunity is often the safest course of action. Taking reasonable steps to mitigate creditor losses may help directors avoid or reduce personal liability.
Penalties and Consequences of Personal Liability
The consequences of being found personally liable as a director can be severe. Financial penalties may include compensation orders requiring directors to repay misused funds or settle creditor debts. In serious cases, the court may issue a director disqualification order under the Company Directors Disqualification Act 1986, preventing individuals from acting as a director for up to 15 years.
Criminal charges can also be brought for fraudulent or negligent conduct, leading to fines or imprisonment. These outcomes not only affect financial stability but can also damage a director’s personal and professional reputation.
Frequently Asked Questions (FAQs)
Can a director be sued personally in the UK?
Yes. A director can be personally sued if they breach their statutory duties, engage in fraudulent behaviour, or act negligently. Claims may be brought by shareholders, creditors, or regulators.
Are directors personally liable for company debts?
Generally, no. However, they can be personally liable if they commit wrongful or fraudulent trading, approve unlawful dividends, or are issued a Personal Liability Notice by HMRC.
Can HMRC chase a director personally?
Yes. HMRC may pursue a director personally using a Personal Liability Notice (PLN) if it believes tax debts arose from fraud or neglect.
What happens if a company goes bust?
If a company becomes insolvent, directors must act in the interests of creditors. Failing to do so could result in personal liability, especially if wrongful trading is involved.
How can directors avoid personal liability?
Directors should maintain good governance, keep accurate records, seek professional advice, and obtain D&O insurance. Acting promptly in financial distress is key.
When Can a Director Be Held Personally Liable? Final Thoughts
While UK company law offers directors protection through limited liability, this protection is not absolute. Directors can be held personally liable in numerous situations, from wrongful trading and fraud to tax offences and health and safety violations.
Understanding the legal boundaries and taking proactive steps to operate responsibly can help directors avoid personal exposure. If you’re uncertain about your obligations or concerned about potential liability, it’s always wise to seek advice from a legal or insolvency professional.
Taking action early can make all the difference in safeguarding your position and protecting your future. Contact us if you need further advice.
