Personal Liability of Directors: Breach of Duty, Tort, and Fraudulent Trading

Directors can be held personally liable for breaching their duties, causing losses to the company. Breach of duty may include not exercising independent judgment, declaring interests, or violating court orders. Directors can also be liable for torts, intellectual property rights violations, and fraudulent trading, among other offenses.

Some duties imposed on the directors have been mentioned in the Companies Act, 2006. These
duties include the duty of the directors to encourage the success of the corporation, exercising
reasonable skill and care and also the need for the directors to exercise independent judgment
and declare interest in transition in the form of an example. Although a breach of duty by the
directors can be potentially ratified by a resolution of the shareholders but if this is not the case, a
company is allowed by the law to initiate a claim, if such director has been held liable for the
reach of its duties and causing loss to the company.1 At the same time the law also provides that
if any financial gain has been made by the director as a result of the breach of duty, such director
may be required to account for such gain to the corporation.
Generally the directors have to provide personal guarantee regarding the loans so that the lender
can be assured that the loan is going to be paid in case the company, due to any reason, is not in a
position to repay the debt. However, giving a personal guarantee can possibly result in conflicts
of interest between the interests of the director and the interests of the company that makes
require careful management for the purpose of avoiding a breach of duty by the director.
Identical can also be considered to be biased due to its personal liability.2
Shareholder agreements: shareholder agreements can be used by the company which provide that
the directors have contributed to assets or the security regarding the debts of the company
1 Stuart, Don. “Punishing Corporate Criminals with Restraint.” Criminal Law Forum, Vol. 6, No. 2, (2009) 82 Criminal
code
2 T Woolfe, "The Criminal Code Act 1995 (Cth) Towards a Realist Vision of Corporate Criminal
Liability" Criminal Law Journal (1997) 21

through an articulate personal guarantee and regarding which the directors are in person
accountable. In case any part is not clear, it is necessary that legal advice should be obtained.
Unpaid shares: in case the Corporation becomes bankrupt and is wound up, the directors of the
company may be required to pay any due share amounts payable and regarding which the
directors are personally liable.3
Contracting personally: in case the directors are not clear that they are going to enter a contract
for the company while arranging a transaction and there is a misapprehension present on part of
the other party that the director has entered the contact personally and under the circumstances, I
dispute arises between the parties, the director can be potentially held liable personally.
Misrepresentation: in cases where a statement has been made by a director to the other party in
the capacity of a director, which the director knows to be untrue and the director intends that the
other party should depend on this statement and which is done to their loss, the director can be
held individually responsible for the monetary loss suffered by the other party. On the other
hand, a fraudulent misrepresentation takes place when it can be established that the statement has
been made while knowing that the statement is false and without belief in it or being reckless
regarding the truth of the statement.4
3 Pamela H. Bucy, "Corporate Criminal Responsibility", in 1 Encyclopedia of Crime and Justice
(2003) 259
4 Amanda Pinto and Martin Evans, Corporate Criminal Liability (2003) p. 66 30

Disregarding orders of the court: when a corporation is undergoing court proceedings and an
order has been issued by the court for the company to do something and the director is aware of
the presence of such court orders but willfully decides to ignore the orders, in such a case the
director can be held responsible in person for contempt of court and can also be put behind bars.
Data Protection breach: when an offense has been committed by a company under the data
protection law and it can be established that the breach had taken place with the consent of the
director or due to the negligence of the director, in such cases the director can be held liable for
an offense along with the company. In such cases a fine equal to £500,000 can be imposed
against the director.
Tort: A tort involves severe liability regarding wrongdoing. In case a tort has been committed by
a director, for example deceit (with the intention to defraud), negligent misstatement (statement
made negligently) in the course of the business of the company, the law provides that in such a
case the director can be held personally responsible. In case the director is involved in a
wrongful activity of the company that amounts to a tort, the director can be held jointly
responsible.5
Intellectual property rights violation: in case it has been established that particular director has
allowed or arranged for another person or corporation's copyrights or the infringement of other
intellectual property rights, such a director can be held personally responsible for redress,
keeping in view the loss suffered by the wronged party.6
5 V.S. Khanna, "Corporate Criminal Liability: What Purpose Does It Serve?", 109 Harv. L. Rev.
(1996) 1477
6 A Ramaiya, Guide to the Companies Act, Lexisnexis Butterworths Wadhwa,16th Ed, (2008) 42

Acting beyond the authority of the company: in case any restrictions have been placed on the
authority of the director according to which they act on behalf of the company, but the director
had exceeded the authority and something is erroneous, even if the corporation can be eventually
held responsible, the corporation can still see damages from such a director who had acted
beyond its authority.
Wrongful/fraudulent trading: in case trading is carried on by a director when the director realizes
how should have realized that the company had become insolvent, an order can be made by the
court and according to which the director is required to personally pay any assets back to the
company that have been improperly dealt with. The duty of the director in case of insolvency
shifts from the company in favor of the creditors of the company.
If any director has knowingly and purposefully placed the assets of the company outside the
reach of the creditors, this can be considered as fraudulent trading and criminal liability can be
attached to it. Fraudulent trading and criminal sanctions may apply in case of the directors
outside an insolvency situation.7 The maximum term of imprisonment that can be imposed by the
court for fraudulent trading is 12 months on summary conviction or it may go up to 10 years in
case of conviction on indictment.8
Data Protection breach: when an offense has been committed by a company under the data
protection law and it can be established that the breach had taken place with the consent of the
director or due to the negligence of the director, in such cases the director can be held liable for
7 Guy Stessens, "Corporate Criminal Liability: A Comparative Perspective" 43 Int'l & Comp. L.Q.
(2009) 495
8 V.S. Khanna, "Corporate Criminal Liability: What Purpose Does It Serve?", 109 Harv. L. Rev. (1996)
1477

an offense along with the company. In such cases a fine up to £500,000 can be imposed against
the director.
Tort: A tort involves several liability regarding wrongdoing. In case a tort has been committed by
a director, for example deceit (with the intention to defraud), negligent misstatement (statement
made negligently) in the course of the business of the company, the law provides that in such a
case the director can be held personally responsible. In case the director is involved in a
wrongful activity of the company that amounts to a tort, the director can be held jointly
responsible.
Breach of intellectual property rights: in case it has been established that particular director has
allowed or arranged for another person or company's copyrights or the infringement of other
intellectual property rights, such a director can be held personally responsible for redress,
keeping in view the loss suffered by the wronged party.
Acting beyond the authority of the company: in case any restrictions have been placed on the
authority of the director according to which they act on behalf of the company, but the director
had exceeded the authority and something goes wrong, even if the company can be ultimately
held responsible, the company can still see compensation from such a director who had acted
beyond its authority.
Wrongful/fraudulent trading: in case trading is carried on by a director when the director realizes
how should have realized that the company had become insolvent, an order can be made by the

court and according to which the director is required to personally pay any assets back to the
company that have been improperly dealt with. The duty of the director in case of insolvency
shifts from the company in favor of the creditors of the company.
If any director has knowingly and purposefully placed the assets of the company outside the
reach of the creditors, this can be considered as fraudulent trading and criminal liability can be
attached to it. Fraudulent trading and criminal sanctions may apply in case of the directors
outside an insolvency situation. The maximum term of imprisonment that can be imposed by the
court for fraudulent trading is 12 months on summary conviction or it may go up to 10 years in
case of conviction on indictment.
Therefore, it is clear that the directors can be held personally liable for a number of issues. The
nature of liability includes civil as well as criminal liability.

Bibliography
A Ramaiya, Guide to the Companies Act, Lexisnexis Butterworths Wadhwa,16th Ed, 2008
Amanda Pinto and Martin Evans, Corporate Criminal Liability (2003) at p. 66 30
Guy Stessens, "Corporate Criminal Liability: A Comparative Perspective" 43 Int'l & Comp. L.Q.
495
Pamela H. Bucy, 2003, "Corporate Criminal Responsibility", in 1 Encyclopedia of Crime and
Justice 259
Stuart, Don. “Punishing Corporate Criminals with Restraint” Criminal Law Forum, v. 6, n. 2, p.
253. 82 Criminal code
T Woolfe, "The Criminal Code Act 1995 (Cth) Towards a Realist Vision of Corporate Criminal
Liability" (1997) 21 Criminal Law Journal
V.S. Khanna, "Corporate Criminal Liability: What Purpose Does It Serve?", 109 Harv. L. Rev.
1477, 1486 (1996)