Directors owe their duties to the company and are therefore potentially liable to the company itself in respect of any breach of those duties. However, directors will not generally incur direct liability to individual shareholders. Most of the general duties under the Companies Act 2006 are fiduciary duties and as a result a director in breach may be liable to compensate or account to the company without the company having to prove a loss. As well as being liable to fines and other penalties for breaches of various statutory duties and offences (for example, under the Bribery Act 2010), directors can also be personally liable to the company in other ways, such as for making unlawful distributions of the company’s assets. It is also possible for directors to assume personal liability to third parties if the circumstances show that they held themselves out as doing so, or if they led the third party to believe that they had authority to act on the company’s behalf when in fact they did not.
As described above, the directors of a company which is threatened with insolvency must take the interests of creditors into account when carrying out their duties to the company. The key areas of liability of the directors of an insolvent company include:
- wrongful trading: if the company goes into insolvent liquidation, the directors can be ordered to contribute to the company’s assets where losses are increased as a result of their failure to stop the company from trading when there was no reasonable prospect of it avoiding the liquidation;
- fraudulent trading: if the directors carry on the business of the company with the intention to defraud creditors (including potential creditors) of the company or creditors of any other person or for any fraudulent purpose will be personally liable to contribute to the company’s assets. This could include payment of a dividend if the motive is to put those funds beyond the reach of creditors;
- misfeasance: a liquidator, a creditor or a shareholder can recover money or damages from the directors of a company who have misapplied, retained or become liable or accountable for any money or property of the company, or have been guilty of misfeasance or breach of fiduciary or other duties in relation to the company.
A disqualification order may be made by the court against a director (or shadow director) of a company that becomes insolvent, if the director’s conduct as a director makes them unfit to be concerned in the management of a company. A disqualified director shall not, without leave of the court, be a director of a company or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a specified period beginning with the date of the order.
There is a statutory regime for derivative claims, enabling members, subject to the court’s permission, to require action to be brought on behalf of the company against directors who are or have been in breach of their duties or have been negligent. In the case of private limited companies, the main threat of legal action against directors for breach of duty is likely to emerge only in the event of the company’s insolvency.