It’s one of the fundamental aspects of company law that a director of a limited company is not usually personally liable in relation to their limited company. However, there are various exceptions to this general rule, which mean that there can be what is often called a “piercing of the corporate veil”. These include scenarios whereby the director:
- has signed a personal guarantee.
- has “held themselves out” in some personal capacity, for example by making certain personal assurances.
- enters into contracts in a personal capacity, failing to make it clear they contracting as an agent of the company.
- commits an act or omission that constitutes personal negligence (for example negligent misrepresentation in the course of negotiating contracts).
- has traded wrongfully.
- has traded fraudulently.
- signs a contract on behalf of the company but before its incorporation as a company.
- disposes of company assets at no value or undervalue.
- pays dividends to shareholders illegally.
- acts whilst subject to a court order for director disqualification.
We can’t look at all of the above in detail in this article, and of course there are complexities and nuances in relation to each of them. As always with the law, no two sets of circumstances are ever the same, and therefore each case is decided on its own facts.
In a recent case, in the context of insolvency, the Supreme Court (the highest court in the land) decided that liability for fraudulent trading is not limited only to persons involved in the management or control of a company such as directors. In fact, the court held that as the relevant legislation uses the phrase "any persons who were knowingly parties to the carrying on of the business", this covers not only company officers such as directors, but also those dealing with the company if they were knowingly parties to the fraudulent activities. Whether a company should be assumed to have officers who should have discovered the fraud is to be determined on the balance of probabilities as a question of fact.
Fraudulent trading happens where the management of a company, its directors or anyone who is knowingly a party, carries on a business with the intention of defrauding creditors, or for any other fraudulent purpose. A company can be accused of fraudulent trading whether it is still trading, has ceased trading or is in the process of being wound up.
As well as the director being personally liable, if fraudulent trading is declared by a court it can also lead to a prison sentence of up to 7 years, financial penalties (unlimited) or disqualification as a director of a UK company of up to 15 years. This can also include a confiscation order being made against the director/individual, meaning that payment of any benefit gained from the fraudulent activity must be personally repaid by that director. A benefit in this context could be where the directors or individuals; knowingly continue to take deposits from customers knowing their orders will not be fulfilled; knowingly moving company assets out of the company; or knowingly issuing inflated invoices.
The effect of this decision is that it broadens the scope of liability for fraudulent trading under insolvency law, impacting external participants in fraudulent schemes. This could therefore apply to an accountant, a lawyer, or indeed any other third party who is knowingly involved.