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Limited liability: how protected are you?

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The concept of limited liability in small-to-medium sized limited companies has not changed under the Companies Act 2006, but the commercial reality and the difficulty in attempting to limit your personal liability as an owner of such a company in the face of more aggressive requests for security for potential debts has perhaps become more pronounced since the Act came into force.

However, the extent to which you might be “liable for debts” really does still depend on which corporate hat you are wearing.

Director of a company

As the director of a company, you are required to comply with your duties under the Act and those fiduciary duties placed under common law. 

Provided you do comply with these provisions (and it is strongly recommended that these are always minuted in the necessary board meetings) then, under the law, a director’s liability for the debts of the company is pretty much non-existent and for an action to be brought against a director is extremely unlikely unless the director is acting fraudulently or with gross negligence or with criminal intent.

Non-executive director

Note that the duties of non-executive directors are now equal to those of executive directors and therefore, even if not involved in the day to day running of the business, non-executive directors need to have a clear understanding of the business.

Business owner

As the owner of a company, the fundamental principle of law is that you are protected from the liability of the company by the “corporate veil” and that your potential liability is limited… again, unless of course there is a criminal element to a shareholder’s activities.

However, as has been identified, irrespective of what the legal position is, banks, investors, landlords, other shareholders and other third parties, will often require directors or the owners of the business to stand behind the actions of the company. There is nothing new in this, in that those lending money will look to obtain water tight security where ever possible. 

The banks now require security held up by “belt, braces and elasticated waistbands” and in so doing they will look behind the corporate veil. It is therefore extremely common for banks in particular to require a personal guarantee secured over the personal property of a majority shareholder. It is less likely though for a non shareholder director to be required to give such a guarantee (and unlikely that such a director would agree to do so).

The Companies Act 2006 retains the clear distinction between the shareholders as owners of the business and the directors who are appointed by the shareholders to operate and run the business. 

What has certainly changed (or been more clearly prevalent in recent years) is that whereas the Act looked to simplify the processes for smaller companies, the banks and landlords, investors and other third parties have continued to chip away at the protection afforded shareholders and the distinction between the company as a separate legal entity and the directors and shareholders as individuals.

If we go back to the wearing of hats – so far as a director is concerned, as a rule of thumb, provided he is purely a director rather than owner, then he should not be liable for the debts of the company whereas, as a director and owner of the business, third parties will continue to look to them for security for the actions and omissions of the company itself.

James Lamont is a partner in Hart Brown‘s commercial team.

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