Directors Can Potentially Be Personally Liable For Company Debts

A recent court case highlighted this very important issue for Company Directors. A Director was sued PERSONALLY with the consequence of Director liability for company debts.

There are few instances in legislation where a Director can be personally liable for a Limited Company’s debts except when they are in breach of Director Duties and liable to pay COMPENSATION for losses they have caused to a company and its creditors. However, there are provisions in the legislation that mean Directors are capable of being directly personally liable along with the company itself for company debts.

SUMMARY OF KEY FACTS

    Three ways specific ways in which Directors can be PERSONALLY liable for company debts:

  • A Director re-uses a prohibited name in breach of Section 216 of the Insolvency Act 1986 in a new company.
  • A Director has been disqualified from acting as a Director.
  • A Director is the subject of a Bankruptcy Order and continued to act in the management of a limited Company.

What Is A Phoenix Company?

A phoenix company is one in which a company that is insolvent has gone into either Creditors Voluntary Liquidation or Compulsory Liquidation (“the old company”) with a new company (“the new company”) arising in effect out of the ashes of the old company. This CAN give rise to Director liability for phoenix company debts.

Concerns About Phoenix Companies

The usual concern about phoenix companies is that a Director may have transferred the business from the old company to the new comapny leaving behind a trail of creditors and then continued trading with the new company as if nothing has really happened. The transfer of the business may have been done improperly by way of a Transaction at Undervalue or Preference which a Liquidator might investigate and then seek to set aside.

From the point of view of creditors, it can be understandably distressing to see a Director trading on, potentially in the same premises, using the same (or similar) name, conducting the same business but with the debts of the old company left unpaid.

Re-Use Of The Company Name

Phoenix company concerns commonly arise when a Director (including a Shadow or De Facto Director) has re-used the old company’s name or trading style in the new company.

Section 216 of the Insolvency Act 1986 makes it a criminal offence for a Director of a company that has gone into insolvent Liquidation to re-use the company name if he or she has been a Director at anytime in the 12 months prior to Liquidation. The restriction prohibiting this continues for 5 years after the commencement of Liquidation.

Director Personal Liability For Re-Using Company Names

If a Director uses a company name they are not permitted to use because they were in office when a company went into Liquidation, they CAN be PERSONALLY LIABLE for the debts of the new company trading in that name in light of Section 217 of the Insolvency Act 1986:

(1) A person is personally responsible for all the relevant debts of a company if at any time—
(a) in contravention of section 216, he is involved in the management of the company, or
(b) as a person who is involved in the management of the company, he acts or is willing to act on instructions given (without the leave of the court) by a person whom he knows at that time to be in contravention in relation to the company of section 216.
(2) Where a person is personally responsible under this section for the relevant debts of a company, he is jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise, is so liable.

Exceptions Available To Section 216 Restrictions

The restriction arising from Section 216 of the Insolvency Act 1986 on the re-use of a company name by a Limited Company Director does NOT apply if:

  • The new company acquires the business of the insolvent company from a Liquidator or an Administrator and notice is given to all the creditors of the insolvent company.
  • The new company has been actively carrying on business for 12 months before the insolvency of the old company.

What Debts Could A Phoenix Company Director Be Liable For?

The debts that such a Director COULD be liable for are those which arose when they were acting as a Director.

It was said in the case of PSV 1982 Ltd v Langdon [2021] EWHC 2475 (Ch):

91. Under s.217 Insolvency Act 1986, a defaulting director is personally responsible for all the “relevant debts” of a company. Section 217(3)(a) provides that a relevant debt is a debt or liability which is “incurred” at a time when the person was involved in the management of the company.

92. … a debt or liability will only be a relevant debt if it is incurred not only at a time when the person was involved in the management of the company but also at a time when the individual is in breach of the prohibition in s.216

The Section 217 Director Personal Liability Triggers

There are two key triggers for Section 217 Director Personal Liaibility:

  • The debt in question must have arisen or crystallised when the person was managing the company.
  • AND at that time a breach of Section 216 of the Insolvency Act 1986 must have taken place.

Personal Liability For Company Debts When Acting While Disqualified

Where a person is a company Director who either has agreed not to act as a Director for a period of time after reaching an agreement with the Insolvency Service or has been subjected to a Disqualification Order, then such a person COULD potentially be made personally liable for company debts.

When a person is disqualified from acting as a Director, he or she MUST NOT act in the management of a Limited company. If such a person does so then they do so at personal risk of being personally liable for the company liabilities that have arisen during the period of time when they were in breach of the disqualification.

Section 15 of the Company Directors Disqualification Act 1986 says that when a Director is subject to a disqualification order or a disqualification undertaking but continues to act as a Director (and in the management of a company) then such a person is liable for company debts as a result of that breach:

(1) A person is personally responsible for all the relevant debts of a company if at any time—
(a) in contravention of a disqualification order or disqualification undertaking or in contravention of section 11 of this Act he is involved in the management of the company, or
(b) as a person who is involved in the management of the company, he acts or is willing to act on instructions given without the leave of the court by a person whom he knows at that time—
(i) to be the subject of a disqualification order made or disqualification undertaking accepted under this Act or under the Company Directors Disqualification (Northern Ireland) Order 2002, or
(ii) to be an undischarged bankrupt.
(2) Where a person is personally responsible under this section for the relevant debts of a company, he is jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise, is so liable.

Exception Available To Section 15 Restrictions

The restriction arising from Section 15 of the Company Directors Disqualification Act 1986 on the personal liability for company debts when acting whilst disqualified does NOT apply if:

  • The Director has permission from the Court to act.

Personal Liability For Acting As A Director While Bankrupt

When a person has been made Bankrupt, he or she MUST NOT act as a Limited Company Director.

Section 11 of the Company Directors Disqualification Act 1986 says that it is an offence for a bankrupt who remains under bankruptcy restrictions to act as a Director and or in the management of a company:

It is an offence for a person to act as director of a company or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, without the leave of the court, at a time when—
(a) he is an undischarged bankrupt,
(aa) a moratorium period under a debt relief order applies in relation to him, or
(b) a bankruptcy restrictions order or a debt relief restrictions order is in force in respect of him.

Exception Available To Section 11 Restriction

The restriction arising from Section 11 of the Company Directors Disqualification Act 1986 on the personal liability for company debts when acting whilst Bankrupt does not apply if:

  • The Bankrupt has permission from the Court to act.

What Next?

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Disclaimer: Director Liability For Company Debts

This page: Director Liability For Company Debts is not legal advice and should not be relied upon as such. This article Director Liability For Company Debts is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.