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The Company is Limited but is my liability?


10 July 2019: Most company directors will have the belief that by setting up a limited company they will have set a limit on their own liabilities. However, a decision in a recent court case resulted in the directors of a company being found liable for creditor claims in tort due to their actions in office, please see case law: Palmer Birch (a Partnership) v Michael Lloyd and Christopher Lloyd [2018] EWHC 2316 (TCC). Although this should not be an issue for most directors, we do anticipate that this may lead to more creditors following this line of pursuit in future to recover monies they are owed

As with all legal cases, to fully understand the judgement it is best to read it in full and/or take legal advice on the interpretation of the judgement. However, in summary, the judgement in this case held that the actions of the directors had induced a breach of contract and they were liable for an unlawful means of conspiracy. The facts of the case pointed to the diversion of funding from one company to a successor, with the intention of enjoying the work provided by a contractor without having paid for it.

More generally, the ‘phoenixing’ of the business of a failed company is a common feature of the insolvency process and we expect this to remain the case. The above legal case does however highlight that the corporate veil that usually protects company directors from personal liability can be pierced if their conduct has fallen below expected standards.

The Insolvency Act details other circumstances in which a director (or de facto director) may be held personally responsible for company liabilities. Although in each case misconduct is likely to be the source of the claim, it is also possible for directors to unwittingly create a situation which has led to a personal liability. The above case law and the directors being found liable in tort, points towards the need for directors to be mindful when making promises to suppliers and customers which they may not later be able to fulfil.

If you or your clients have any concerns regarding the solvency of your company and the potential risk of company debt becoming a personal liability, please do not hesitate to contact us at BRI. We will always aim to provide the right advice first time, every time.