Being the director of a limited company gives you limited liability.
This essentially means that you are not responsible for your business’s debts unless you have personally guaranteed payments, such as a rent agreement or a bank loan.
You will need to take specific steps to retain your limited liability if you find that your company is in trouble.
If you are found guilty of any wrongful conduct, you will automatically become personally liable for any debts accumulated by your company (something that can catch out directors more often than you may think).
If the failure of your business is a certainty, you will become personally liable if you continue to trade.
The majority of directors will have put a lot of time and effort into their company and will likely find it difficult to admit there is no possibility of its return to profitability.
To avoid personal liability, you must prove that you believed that your business could be saved within reasonable doubt.
You must also show that you did everything within your power to minimise any potential losses to creditors right up to the point of the company’s liquidation.
It is a terrible practice to continue taking credit from suppliers or other creditors if you know you cannot pay back the money.
Steps to avoid personal liability
- Whatever has happened in the past with your limited company, any wrongful conduct will be judged on the information you have available to you at the relevant point in time. Unfortunately, too much hindsight can often deter you from making the correct decision when that time comes.
- If you have a specialised proficiency, you will likely be judged with this in mind, meaning you may have more responsibility than a ‘lay’ director who would not have the knowledge you are assumed to have based on your expertise.
- Remember that the liability doesn’t fall only on the manager of the company. If you are an investor or a non-executive director – even if you only attend board meetings occasionally – it will be assumed that you had a part to play in critical business decisions.
- It would help if you made careful and detailed notes (including dates) of all action taken to protect your creditors from being unpaid. This will help you to subsequently provide evidence in the eventuality that you are put before the courts.
What to do next
As mentioned above, even ‘passive’ directors who aren’t heavily involved in the day-to-day workings of your business will not be exempt from this rule.
Even if you limit your involvement, it will not protect you from being personally liable for your company’s debt. The same applies to shareholders, lenders, and investors present when the more significant company decisions are made.
The best way to avoid liability could be to become an ‘observer,’ with board meeting attendance under contract and no Companies Act Director status.
If you do this, make sure a well-drafted agreement has been drawn up to avoid you being treated by the courts as a shadow director.
If you would like some more advice, please contact the Future Strategy team today.
