Business Dispute Resolution Article
03 February, 2022
Directors, shareholders and, indeed, the company itself are all separate legal personalities and entities, each of which assume separate legal rights and obligations. Directors are duty bound to promote their company's success and must not act in a way to diverge from this in favour of actions that promote their own personal interest.
But what are the specific duties a director owes? How and when does a director have personal liability for company obligations and liabilities? What is "piercing the corporate veil" and does this apply to directors?
This is a subject which every company director should be familiar with, both in terms of understanding their duties and how to avoid personal liability should the company fail, or other circumstances arise which lead to an investigation into the affairs of the company.
Sections 171 to 177 of the Companies Act 2006 (CA 2006) set out seven core general directors' duties which are as follows:
In the most part, the general duties will come into force upon taking up office and end upon resignation as director. However, the duties contained in s.175 and s.176 continue to apply after the director has resigned their office.
No. Section 232 CA 2006 makes it clear that any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to the director in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void.
These general duties are owed to the company by (1) directors who are registered at Companies House and properly appointed to the board (known as de jure directors), (2) by persons who act as a director but who have not been appointed to the board (known as de facto directors); and (3) by 'shadow' directors (persons in accordance with whose directions or instructions the directors of a company are accustomed to act).
Aside from the company being able to enforce these general duties, it is also worth noting that shareholders are able to instigate 'derivative' proceedings against directors (on the company's behalf) under s.260 CA 2006, for alleged breach of a director's duty to promote the success of the company under s.172 CA 2006 and in particular in relation to actual or proposed acts or omission involving negligence, default, breach of duty and breach of trust by a director, former director, of shadow director.
Aside from the statutory general duties, directors owe a number of other duties for and on behalf of the company they represent, including the following:
A shareholder is a separate legal entity to the company. However, the doctrine of "piercing the corporate veil" essentially means establishing personal liability on a shareholder for a liability which would ordinarily rest with the company and, thereby, going beyond the usual protection offered by a shareholder's limited liability and the separate legal entity of the company.
This typically arises in cases where a company's separate legal personality is being abused for the purpose of some impropriety.
The case of Petrodel Resources Ltd v Prest  UKSC 34, established that the Court may, in certain situations, lift and pierce the corporate veil where a person was under an existing legal obligation or liability or subject to an existing legal restriction which they deliberately evaded or whose enforcement they deliberately frustrated by interposing a company under his control.
It therefore only applies generally to shareholders but could, of course, also affect those directors who are shareholders.
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