Are directors personally liable for company debts? No, directors are not liable for company debts. Only a company is liable for its debts because a company is a separate legal entity or person to the directors who run its business activities.
A company’s debts can consist of:
- contractual debts arising from agreements with suppliers of goods and services;
- statutory debts such as those that come from liability for HMRC tax debts;
- liabilities which arise due to common law such as neglect, trespass, fraud, deceit, nuisance etc
Contractual debts and statutory debts will be by far the most common types of company debts. Common law debts will usually arise due to company misconduct.
Company Liability For Company Debts
A company is liable for its debts because it has its own registration and personality. This has its roots in the well known case of Salomon v Salomon & Co Ltd [1896] UKHL 1:
… once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself…
Whilst directors may cause a company to enter into contracts and agreements or to trade which may give rise to liabilities, they are doing so for the benefit of the company and crucially regardless of motivation, legitimately in the name of the company. Without something more directors can have no personal liability for company debts.
Director Liability To A Company
However, there can be circumstances in which a director could be liable for company debts. These circumstances are out of the norm and should not be treated as directors’ personal liability for company debts as a matter of course.
Whilst directors are not personally liable for company debts they can be liable with reference to a company’s debts in one of two ways. Either a director can volunteer to be liable to a company creditor for the company’s debt under what is known as a personal guarantee or alternatively due to serious misconduct a director can be held liable to compensate the company and or its creditors for loss caused.
That does not change the fact that a director cannot be directly liable for the company’s debts due to operating in good faith. A director who provides a personal guarantee will do so to assist a company obtain creditor or supplies but they have no obligation to do so.
Director Misconduct And Liability For Company Debts
When a director’s misconduct results in personal liability for loss caused to the company that is not personal liability for company debts; it is a liability of the director to the company itself. Examples of such misconduct will be wrongful trading, misfeasance and fraudulent trading.
Director liability to a company is not the same thing as director liability for company debts.
A director will be jointly personally liable with a company for debts arising when he or she acts as a director whilst subject to a director disqualification order and or is in bankruptcy in light of Section 15 of the Company Directors Disqualification Act 1986 or when in breach of Section 216 of the Insolvency Act 1986 by re-using a company’s name.
Separate to that in cases of fraud, a director could be directly liable to company creditors for the debts. Cases of fraud and deceit can also lead to what is known as piercing the corporate veil or lifting of this veil. However, this can only arise from serious misconduct whereby the veil of incorporation provided by a limited company is abused by way of deceit.
