- The buck stops with you...or does it?
The buck stops with you…or does it?
The buck stops with you...or does it?14 May 2019
A company is a distinct legal personality, but there are circumstances where directors (the decision-makers) and shareholders (the owners) of companies can be held personally liable for the actions of a company, such as when they act outside of their authority or don’t follow the rules, a few examples of which are set out below:
1. Following the rules
Legislation is stringent on directors, and there are many ways in which directors can be held personally liable under company law, for example, if they do not:
- maintain company records correctly;
- pay dividends correctly; or
- follow health and safety laws.
2. Doing deals
Usually, a company is bound by a contract made by a director even if they were acting outside their actual authority, provided that it is within apparent authority. If a director acts outside actual and apparent authority, the company is not bound by their actions and the director is personally liable for breach of that contract.
3. Money troubles
There are lots of circumstances where directors can be held liable in respect of finances and we would be happy to discuss these with you in more detail. But, if a company goes into insolvent liquidation, and a director knew or ought to have known that there was no reasonable prospect of avoiding it, a director could be required to personally contribute financially to the company’s assets.
Generally, directors are not liable for any debts incurred on the company’s behalf, except, and unless, they engage in misconduct when incurring those debts, for example, by committing fraudulent misrepresentation
Directors sometimes personally guarantee loans made to the company. If the company defaults on these loans, the lender may enforce guarantees against a director’s personal assets, which may result in a director having to sell their family home or other assets to pay the company’s debts.
Legal advice should always be sought before a director enters into a personal guarantee.
Generally, shareholders are not liable for a private limited company’s debts except, for example, if the shareholder has guaranteed that debt as above.
The court can, in very limited circumstances, look behind the separate personality of the company to fix liability on the shareholders; for example, in cases of fraud or deliberate breach of trust.
The courts aim to ensure that there is an appropriate remedy available against individuals who have committed crime using a company that they own.
Shareholders should also be aware of the Proceeds of Crime Act 2002 (POCA) which gives the courts power to lift a corporate veil and apply a confiscation order to assets owned by a company where they suspect a crime.
There is a lot that both directors and shareholders need to be aware of to ensure they stay on the right side of the law so that the buck does not stop with them.
If you would like more information please contact our corporate team or call 0161 832 3434.