Personal Liability

Personal liability

Personal liability is a very real concern for many business owners.

There are a number of situations in which an individual may become personally liable to pay business debts or make payments to third parties; even where that individual has been acting in a professional capacity. For example, personal liability may arise:  

• upon the provision of a personal guarantee;
• where a director of a company should have concluded that the company would not be able to avoid insolvent liquidation, but the company has continued to trade in any event;
• where a director has misapplied company property;
• where a director has breached a fiduciary duty; and
• where a director or limited liability partner has been negligent, has assumed a personal duty of care, and has acted in breach of that duty.

It is important that you take steps to ensure that your individual risk is limited as far as possible, to avoid a situation where your personal assets (such as your home, car and personal bank account) become exposed.

No matter how small your business is, you should ensure that it has its own bank account to ensure that the business affairs are kept entirely separate from personal affairs. This will help to avoid any assumption of personal accountability arising.  

Similarly, when entering into contracts on behalf of the company, documents should always be executed correctly. Directors and employees should never sign company contracts using only their name, but should always make it clear that the signature is being provided ‘on behalf of’ the company. Although this sounds simple, it is an easy mistake to make when faced with a busy work schedule; and unfortunately, is one that could have very serious consequences.

While it is not always possible to eliminate personal risk altogether, there are various things that we can do to help minimise your risk and the potential personal impact. For example, we can:

• draft or review personal guarantee documentation;
• draft or review Limited Liability Partnership Agreements and Shareholders Agreements to check for clauses which seek to impose onerous personal obligations. Our team can prepare an agreement for you which is specifically tailored to your business’s needs.
• provide bespoke advice on how best to avoid personal liability under the Insolvency Act 1986 if you are concerned that your company is at risk of becoming insolvent.