Director Liability for Company Debts: When Personal Liability May Arise

A company’s separate legal personality usually protects directors from personal liability. That protection is not absolute.

The issue

A supplier delivers goods to a long-standing customer, expecting payment based on the parties’ history. When payment is not made, the supplier discovers that the business has closed, liquidation proceedings are underway, and the director is difficult to locate.

The legal principle

The key question is whether the company merely failed commercially, or whether it bought goods knowing it could not pay. Section 424(1) of the Companies Act may allow personal liability where business is carried on recklessly or with intent to defraud creditors.

Practical point

A claim against a director requires evidence. Suppliers should preserve orders, communications, payment history and any information showing the company’s financial position when the debt was incurred.