Personal Liability Risks for Company Directors
Usually, a company director will not be personally liable for company debts or losses because they’re protected by limited liability. However, a company director can have personal liabilities in certain situations. If fraud or criminal activity has been committed, directors may face personal liability.
Situations Leading to Personal Liability
- Directors have a duty to keep accurate financial records. If records are insufficient, directors risk personal liability.
- If the company trades while insolvent, directors use company funds illegally, avoid legal obligations of the company, or if a subsidiary company causes damages it cannot pay, directors face personal liability.
Protecting Against Personal Liability
Directors should understand personal liability risks. Carrying liability insurance can protect directors from some losses.
Liability Risks and Actions for Company Directors
Directors may face criminal charges for aiding illegal acts of the company. Unlawful actions can lead to personal liability for company debts. Directors should take care even when protected by limited liability.
Repercussions of Breaching Director Duties
- The company itself often takes action when directors breach duties.
- Shareholders can also make a claim if they suffer financial loss from director breaches.
- If directors or shareholders act negligently or fraudulently, they may be liable for company losses.
- Trading while insolvent also risks director liability.
- Effective financial management and sustainable operations reduce liability risks.
Understanding and Mitigating Personal Liability Risks for Directors
As a company director, you can be held personally liable for debts or losses in certain circumstances. Where crimes or illegal activity have occurred, you face personal liability. Keeping accurate financial records is a director duty, so insufficient records risk liability.
Other Situations Involving Liability
- If insolvent trading happens, or you illegally use funds, you may face liability.
- Avoiding legal company obligations or letting subsidiaries cause unpayable damages leads to liability.
- Directors should understand liability risks and consider insurance cover.
- After illegal acts, negligence causing losses, or flawed governance, liability actions can happen despite limited protection.
- Common liability risks include reckless trading, dishonest business, and flawed governance, but good management and sustainability reduce risk.