Is A Director Personally Liable When A Company May Be Insolvent?

The concept of limited liability for company owners has roots as far back as the 1600s, and is a fundamental cornerstone of UK company law. 

It is enshrined in the Companies Act 2006, which confirms that a company has a separate legal personality from its owners (shareholders), which means that they are not liable for its debts. 

However, once you throw insolvency into the mix, the shield of limited liability is perhaps not as robust as it may first appear. 

“Piercing the corporate veil” is the term for circumstances where those that run companies can be personally liable. 

So what are the situations where personal liability can arise? 

The first and most obvious is where a director/ shareholder has signed a personal guarantee. This will create a direct liability where the company is unable to pay. 

A second example relates to HM Revenue Customs. HMRC can pursue a director personally if company taxes are unpaid due to wrongdoing, fraud, neglect or deliberate avoidance. HMRC can in certain circumstances issue a “Personal Liability Notice” to transfer unpaid tax debt to directors. For more detail on HMRC and personal liability please see this article Can HMRC Make Directors Personally Liable for Company Tax Debts? - Business Rescue Experts 

A third example is more of a grey area, and is where professional guidance is absolutely key. This is where the company may be insolvent, but trading is continuing. In this situation a director owes duties to the creditors of the company. If the position of the creditors is not protected, then personal liability may follow. This will occur where the company subsequently enters an insolvency process. 

Read more about directors’ duties on insolvency here: https://www.businessrescueexpert.co.uk/directors-duties-when-insolvent/ 

A liquidator or administrator has a wide array of statutory provisions under which directors may be personally held to account, for example for wrongful trading, preferences or transactions at undervalue, or breach of duty/misfeasance. Liability on the part of the director/ shareholder may be uncapped depending on the circumstances. 

It is therefore critical that if a director has any doubt as to whether their company may be insolvent that they seek robust advice as soon as possible to ensure that their position, and the position of all stakeholders, is protected as strongly as possible. 

At TRE, our focus is on strong director protection, and we are highly experienced at assisting directors who may need support.