Company director personal liability

Hello there. I am Gemma, a friendly legal assistant at Lawyer Destroyer. I would be happy to explain how this works in England and Wales.

The general rule:

In most situations, the answer is no. A limited company is treated by the law as a completely separate legal person. This protection is what we call limited liability.

When a limited company does business, the contracts are between the company and the customer or supplier. The directors are simply acting as agents on behalf of the company. If things go wrong, such as an unpaid bill or a breached contract, the customer or supplier generally has to bring their claim against the company itself, rather than the directors personally.

When a director can be sued personally:

There are some important exceptions to this rule. A director might face a personal claim from a customer or supplier in the following situations:

1. Personal guarantees. If a director signed a personal guarantee with a supplier, the supplier can sue the director directly if the company fails to pay. This is a very common requirement in trade supplier agreements, commercial leases, and business loans.

2. Fraud or deceit. If a director deliberately lies or acts dishonestly to persuade a customer or supplier to part with money or goods, they cannot hide behind the company structure. The victim can sue the director personally for deceit.

3. Assuming personal responsibility. Occasionally, a director might step outside their normal corporate role and give a customer or supplier a specialist personal assurance. If the customer or supplier relies on that specific personal promise and loses money, they might be able to sue the director for negligence. The courts look very closely at the facts here to see if the director truly took on personal responsibility, rather than just speaking for the business.

4. Acting without authority. If a director makes a contract on behalf of a company that does not actually exist yet, or signs a contract they had absolutely no authority to sign, the other party might be able to pursue them personally for breach of warranty of authority.

5. Using a prohibited company name. If a company goes into liquidation, the directors are strictly restricted by insolvency law from setting up a new company with the same or a very similar name. If they do this without following the correct procedures, they can become personally liable for the new company's debts to suppliers and customers.

Practical next steps:

If you are looking into whether a director can be held liable, or if you are a director worried about a personal claim, here is a sensible way to approach the situation:

1. Gather the documents. Look closely at the original contracts, terms and conditions, and credit account applications. Check specifically if a personal guarantee clause was signed.

2. Review the communications. Look at emails and letters to see exactly what was said. Did the director make explicit personal promises, or were they clearly communicating on behalf of the company using their formal job title and a company signature block?

3. Assess the financial reality. Often, a supplier or customer wants to sue a director because the company itself has completely run out of money. If the company is insolvent, but there is no evidence of fraud or a personal guarantee, bringing a complex personal claim against a director is usually very difficult and highly risky from a cost perspective.

4. Consider your early resolution options. Before rushing to court, it is usually practical to set out the legal position in a clear, polite letter. If there is a genuine dispute over who is liable, an informal settlement discussion or mediation can save a huge amount of time, stress, and expense.

The exact position will always depend on the specific paperwork, the exact language used during negotiations, and the financial status of the business involved.