First, the good news. Directors of limited liability companies are not generally liable to third parties unless they have given a specific guarantee. But they must, nonetheless, comply with a range of legal duties and maintain high standards in the way they do business.
In fulfilling your duties, you must exercise reasonable care, skill and diligence. This is measured against your own skills or those expected of a person in your position - whichever is the higher. Honest ignorance is no defence.
You also risk personal liability if you sign a contract on the company's behalf under which you or someone connected to you has an interest, or you stand personally to make money. Bribes and commission are off-limits. If you enter into a property-related transaction with the company, there are specific rules to follow - so take proper advice. Not only could a breach of your duties result in the contracts being cancelled, but you might have to compensate the firm and repay any profits.
Another danger area is entering into contracts on behalf of the company before it's incorporated, or failing to make clear the basis on which you are contracting. And if you manage a company while disqualified, or act on the instructions of someone who is disqualified, you will be personally liable for any business undertaken.
Breach of statutory obligations such as health and safety, environmental protection, taxation and accounting may result in a fine or worse. In some cases there is 'strict' liability: directors carry the can even if they are unaware of the firm's wrongdoing.
Tough rules apply in insolvency. Where the directors are guilty of fraudulent trading, they may become personally liable for debts incurred by the company: no surprise there. But the same applies to 'wrongful' trading, where the company continues to trade when the directors knew or should have known that there was no reasonable prospect of avoiding liquidation.
To avoid personal liability, you must recognise when to stop trading and take all steps to minimise losses. It is no defence for directors to claim that they acted honestly and reasonably. Seek expert advice if you are worried about the firm's ability to pay its debts.
The news isn't all bad. Companies may indemnify directors against the cost of defending legal action brought by a third party or even by the company itself. But they will not be covered if found guilty of an offence, or if their defence is unsuccessful in a case brought by the company.
If you act honestly and reasonably and to the best of your abilities (while recognising that you may need skills training in some areas), you should be able to sleep soundly. But check your D&O insurance first.
Tessa Briggs is a partner at Lewis Silkin LLP (tessa.briggs@lewissilkin.com)
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