Personal Liabilities of Directors Under Companies Act

In England and Wales, the vast majority of incorporated businesses are private companies limited by shares or limited liability partnerships (LLPs). These structures are favoured in the UK as both LLPs and limited companies shelter the personal assets of their members (partners in an LLP, shareholders in a limited company) in the event of a liability of the entity itself. However, there are still a number of personal risks associated with the operation of these businesses.

The directors and other officers who manage the day-to-day conduct of businesses have significant statutory responsibilities contained within the applicable governing statute. Their liabilities vary depending on the nature of the entity which they stand behind, and the key pieces of statute governing such roles include the Companies Act 2006 (CA 2006), the Limited Liability Partnerships Act 2000 (LLPA  2000), and the Insolvency Act 1986 (IA 1986).

Directors' Liability

Private limited companies

Directors of private limited companies owe general statutory duties under the CA 2006, as contained within s.171-177, including:

• The duty to act within powers (s.171) – Directors must comply with the company’s constitution and only exercise powers for the purposes for which they are conferred.
• Duty to promote the success of the company (s.172) – They must act in good faith to consider the long-term consequences of decisions, employee interests and the business’s relationships, amongst other things.
• Duties to exercise independent judgment (s.173) and reasonable care, skill, and diligence (s.174).
• Duties to avoid conflicts of interest (s.175), to declare interests in proposed transactions or arrangements (s. 177), and to not accept benefits from third parties (s.176).

A breach of these duties can lead to personal liability on behalf of the directors, following which a variety of penalties may be imposed upon them, such as:

• Civil penalties, such as financial compensation or injunctions placed upon the individual by the courts or the Financial Conduct Authority.
• Director disqualification pursuant to the Company Directors Disqualification Act 1986, which may be imposed for a period between 2 to 15 years.
• Criminal liability such as fraudulent conduct (Fraud Act 2006, s.4) or failing to prevent financial crime (Economic Crime and Corporate Transparency Act 2023).

Directors may also be personally liable for debts incurred by the Company if they allow the company to trade while insolvent (IA 1986, s.214, wrongful trading).

Limited Liability Partnerships

LLPs operate without directors, instead having designated members responsible for compliance under the LLPA 2000. An LLP’s members can be held personally liable for a variety of issues, the most prevalent of which being:

• Fraudulent trading (IA 1986, s.213) – Knowingly continuing business to defraud creditors.
• Wrongful trading (IA 1986, s.214) – Failing to take steps to prevent insolvency when aware of financial distress.
• Negligence – s.6(4) of the LLPA 2000 confirms joint liability of the LLP and the individual member for a member’s own wrongful acts or omissions, such as negligence, during the business of the LLP.

Unlike directors of private limited companies, LLP members do not have general fiduciary duties but may have obligations under their own LLP agreement or common law.

Other company officers

Company officers, including company secretaries, have statutory responsibilities under CA 2006. Where appointed, a private limited company’s secretary must ensure compliance with:

• Filing obligations (s.441) – Late or missing accounts can result in fines.
• Disclosure requirements (s.82-85) – Failing to maintain proper registers and information can lead to legal consequences.

Further, officers of a business, whether that of a private limited company or an LLP, can be held personally liable under the Bribery Act 2010 if they fail to prevent corrupt practices within the company.

Directors’ and Officers’ (D&O) Liability Insurance

D&O insurance is a popular type of cover designed to protect company directors, members of LLPs, officers, and in some cases senior managers, from personal financial loss if they are sued in connection with the performance of their duties. It typically covers legal defence costs, investigation expenses, and any damages or settlements arising from allegations of wrongful acts such as negligence, breach of duty, mismanagement, or regulatory non-compliance.

Someone might choose to take out D&O insurance to reduce the personal risk of being held financially liable for decisions made in their corporate role. Without this cover, individuals could be personally exposed to significant legal costs and damages arising from the risks set out in this article, even if the company is a limited entity. D&O insurance provides peace of mind and encourages skilled professionals to accept leadership roles without fear of personal financial ruin due to claims brought by shareholders, employees, regulators, or third parties.

Conclusion

While private limited companies and LLPs offer a shield against personal liability to shareholders and members, their directors and other officers can still face personal, civil or criminal liability for issues like statutory breaches, negligence, and fraud. Compliance with statute such as the Companies Act 2006 and Insolvency Act 1986, any applicable professional regulatory frameworks, and exploring the option of insuring against risk are essential to avoid such liability.

How to Get in Contact

We specialise in corporate governance, alongside defending companies and individuals in litigation matters. For further insights on corporate governance and how to provide yourself with sufficient protection against potential litigation, reach out to our legal experts below or call +44 (0)203 987 0222.

• Justin Ellis - justin.ellis@ilaw.co.uk

• Tony Roberts - tony.roberts@ilaw.co.uk

• Joe Moulding - joe.moulding@ilaw.co.uk

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