When is a company director personally liable and what are a company director’s responsibilities during insolvency? Neil Dingley of Moore Recovery in Stoke on Trent explains the duties of a company director.

What is the role of a company director?

A limited company is made up of shareholders (members) and one or more directors:

• The shareholders are the owners of the company. Typically, they will have invested money into the company in exchange for shares.
• The company directors are responsible for the running of the company on a day to day basis. It is the directors’ responsibility to ensure that the business of the company is conducted in accordance with its own Articles of Association and the provisions of the Companies Act 2006, and that any profits the company makes are returned to the shareholders by way of dividends. Directors have a fiduciary duty to act in good faith and in the best interests of the company.

In small or family run companies it is often the case that the directors and the shareholders are the same people, metaphorically wearing different hats.

What are the statutory duties of a director under the Companies Act 2006?

A director’s statutory duties are set out in sections 170 to 181 of the Companies Act 2006. In broad terms they set out the ways a director owes a duty to the company. They can be summarised as follows:

1. To act within powers. The powers of a director are set out in the company’s constitution (broadly speaking its Articles of Association).

2. To promote the success of the company for the benefit of its members (shareholders) as a whole. In promoting the success of the company, a director must have specific regard to the following provisions:

• the likely consequences of any decisions in the long run
• the interests of the employees of the company
• the need to foster the company’s business relationships with its stakeholders, such as customers and suppliers
• the impact of the company’s business on the community and the environment
• the desirability of the company maintaining a reputation for a high standard of business conduct
• the need to act fairly between members of the company

3. To exercise independent judgement.

4. To exercise reasonable care, skill and diligence.

5. To avoid conflicts of interest.

6. Not to accept benefits from third parties.

7. To declare interests in transactions or arrangements with the company.

When is a company director personally liable?

Generally, a director may be personally liable when he or she:

1. fails to meet his or her responsibilities under the Companies Act 2006
2. falls foul of one or more of the provisions of the Insolvency Act 1986
3. is found guilty of an offence under the Company Directors Disqualification Act 1986 and as a result is fined or has a compensation order awarded against him/her

Companies Act 2006

Liabilities under the Companies Act 2006 can arise mainly as a result of a breach of the statutory duties as set out in sections 170 to 181 of this Act.

Insolvency Act 1986

Liabilities arising under the Insolvency Act 1986 can derive from the following:

• wrongful trading (section 214) – This arises when a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration at some point before the start of the winding up of a company. The director may be liable to contribute to the company’s assets.
• fraudulent trading (section 213) – This arises in the course of a winding up when it appears that any business of the company has been carried out with the intention of defrauding creditors. The court may direct that the director contributes to the company’s assets.
• misfeasance (section 212) – This is something of a ‘catch all’ section which applies if, in the course of a winding up, a director has misapplied or retained property of the company or is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. In this case, the court may require the director to restore or account for any property or to contribute to the company’s assets.

It is worth noting that with the advent of the Corporate Governance and Insolvency Act 2020 (CIGA) the provisions relating to wrongful trading have been relaxed until 30 September 2020 due to the circumstances companies and their directors find themselves in as a result of the coronavirus (COVID-19) pandemic. However, the other provisions under the Insolvency Act remain, as do those under the Companies Act.

Company Directors Disqualification Act 1986

Liabilities under the Company Directors Disqualification Act 1986 arise as a result of investigations into a director’s conduct following a liquidation or administration. A director can be fined and/or disqualified as a result of breaches of the Companies Act and/or offences under the Insolvency Act.

In addition, further to the introduction of the Small Business, Enterprise and Employment Act 2015, a director may have a compensation order awarded against him or her. This is relatively new legislation and only one compensation order has been awarded against a disqualified director.

What are a company director’s responsibilities during insolvency?

While a director has a duty to the company, in times of financial distress, such as when a director knows or suspects the company to be insolvent, his or her duty is no longer to the company but to the creditors of the company, as it is potentially their interests which may be prejudiced as a result of any action or inaction on the part of a director.

When a company enters into formal insolvency proceeding such as liquidation or administration, a director will remain a director for statutory purposes, however his or her executive powers will end and he or she will have a responsibility to cooperate with the administrator or liquidator. 

In summary, whilst a company continues to trade in the normal way, a director has a duty and responsibilities to ensure that it is run properly in accordance with its Articles and with the relevant legislation, with a view to maximising the return to the members. However, if a company is struggling financially and potentially insolvent a director’s duties turn to minimising the risk and exposure of the company’s creditors, and if he or she fails to do this, the consequence could be personal liability.

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.

See also

What you need to know about Corporate Insolvency and Governance Bill

What to do if you receive a winding up petition from HMRC

Insolvency notices

Find out more

Companies Act 2006 (Legislation)

Company Directors Disqualification act 1986 (Legislation)

Insolvency Act 1986 (Legislation)

Corporate Governance and Insolvency Act 2020 (Legislation)

Small Business, Enterprise and Employment Act 2015 (Legislation)

Image: Getty Images

Publication date: 5 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.