Strategy & Operations » Legal » What is the extent of directors’ personal liability?

What is the extent of directors' personal liability?

Directors, banks and those managing companies who may not be directors, need to be aware of the available shields of protection, says Steve Thomas, a solicitor at Excello Law.

The restaurant business has always been notoriously precarious. Fashionable one year and passé the next, restaurants are subject to rapidly changing consumer taste.  In the last two years, well-known chains such as Carluccio’s, Prezzo, Byron Burger and Gourmet Burger Kitchen have closed numerous outlets amid rising costs from higher wages, an increase in property taxes and heavy competition in the casual dining market.

The latest casualty is an even more high profile restaurant group – Jamie Oliver’s 25 UK restaurants. Announcement of the collapse made big headlines: all but three of Jamie Oliver’s restaurants have closed. As a result, more than 1,300 jobs are understood to be at risk nationally from the collapse of the business, while dozens of suppliers are also reported to be out of pocket. Following protracted attempts to keep the business going ended in failure, KPMG were recently called in as administrators of the Jamie Oliver Restaurant Group Ltd, as well as four other subsidiary companies.

Mail Online followed up with a lead story, headlined: ‘Bailiffs clear out Jamie Oliver’s flagship Italian restaurant: Tables, chairs and kitchen equipment are removed from London eaterie.’ Accompanied by photos of men in overalls removing a wide assortment of items, including chopping boards, the article explained: ‘It took the team of bailiffs four hours to clear the site of tables, chairs, kitchen equipment, machinery and even an orange scooter.’

The number and size of the headlines were that much greater because the Jamie Oliver restaurant chain was trading under the name of one of Britain’s best-know celebrity chefs.

The fact that Oliver’s restaurant brand has collapsed into administration not only highlights the precarious nature of the sector, but also the risks faced by directors of businesses when insolvency strikes. Directors are at risk because administrators, banks and creditors may choose to pursue them personally by lifting or piercing the corporate veil.

The background to the collapse of the Oliver chain can be seen in a statement issued by the administrators which sheds light on his attempts to keep the struggling business afloat: “The group had recently undertaken a process to secure additional investment into the business and, since the beginning of this year, Jamie Oliver has made available additional funds of £4m to support the fundraising. However, with no suitable investment forthcoming and in light of the very difficult current trading environment, the directors resolved to appoint administrators.”

During a previous restructuring of his restaurant business last year, it was widely reported that Oliver had provided personal guarantees to both HSBC and Brakes, one of Britain’s biggest food suppliers food. According to the The Daily Telegraph, ‘they are poised to pursue’ Oliver over the debts which have arisen from the collapse of his business. The guarantees that he had provided would enable them to claim against him personally for any sums that remain outstanding. However, there are many defences available to a guarantee given in circumstances which are not criticised by the Courts. Directors in many occasions are forced into giving guarantees or suffer from economic duress which gives rise to defences to claims being made against them.

Oliver’s guarantees, as reported, stand out as a prime example of how the insolvency of a company can result in personal liability, both for its directors and for the banks involved in financing the business. It should be self-evident that, as a general rule, this is a situation that can and should be avoided. Good corporate governance should ensure that it only happens when no alternative source of financing is available.

Breadth of challenges

For those directors of a business who find themselves caught up in an insolvency situation, a multiplicity of potential problems may arise. The law in this field can become a minefield for the unwary: the Insolvency Act 1986 and the Companies Act 2006 are both littered with an arsenal of potential weapons that can be used to attack directors personally.

In an increasingly aggressive environment, administrators and liquidators are now significantly more robust in using tools available under these two Acts in order to launch personal attacks on directors in order to recoup funds. More often than not, these directors are not to blame personally for a company’s downfall and sometimes forced into giving security which they do not want to give and is not needed.

Instead, this invariably arises from market forces in a particular sector or adverse economic conditions rather than because of incompetence or mismanagement. Such an explanation does not, however, provide sufficient mitigation or protection from the legal consequences. Subject to the provisions of insolvency or company legislation deployed by an office holder who has unlimited resources at their disposal, unfortunate directors may then find themselves defenceless.

None of this is very likely to apply to Oliver.  It is, therefore, highly probable that he would have been professionally advised in relation to all the personal liabilities that he has undertaken, and the full extent of the attendant risks and responsibilities.

But many others are not quite as fortunate. Often, the director who has usually lost their job as a result of the insolvency, is left on their own without the advantage of professional advice. They must then face a barrage of questions and allegations that they have to answer, typically without the advantage of having any access to the company’s books and records. By contrast, these are often likely to be in the hands of those who are making the allegations against them.

So what is the extent of personal ability applied to directors? Critically, English insolvency law does not formally recognise any distinction between the duties and liabilities of executive directors and non-executive directors. Although day-to-day management of a company is delegated to the executive directors by its shareholders, non-executive directors can still bear responsibility when things go wrong. Accordingly, every director can incur personal liability, both civil and criminal, for their acts or omissions in directing the company.

And what happens when a company may be in danger of becoming insolvent at some future point? The practical dilemma facing directors where this is a real risk of a company becoming insolvent is whether to continue trading or to put the company into administration or liquidation and to appoint administrative receivers. Directors have to bear in mind their statutory duty to minimise any potential loss to creditors. The steps taken will depend upon the circumstances. Being prudent, a full evaluation of the situation should be carried out with the assistance of professional advisers in order to determine the best course of action.

Under the Companies Act, Liquidators can recover money from directors of a company who have misapplied, retained or become liable or accountable for any of its assets. But the Insolvency Act also provides that a director may be liable to contribute personally to the assets of the insolvent company for the benefit of its creditors if: ‘at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.’

The question of whether it is fair for a director to be treated in this way, especially when the collapse of the business was due to market forces beyond their control, is a moot point. But the law is as it stands, and there is currently no impetus for it to change. But what really matters is how it is applied. The decision to penalise directors by those who are managing the insolvency can therefore lift and shatter the protection provided by the corporate structure. Clearly, personal guarantees of the type given by Oliver extend far beyond such protection, and it is manifestly unwise to sign such a guarantee unless you are fully aware of the risks and fully prepared to take them on.

Potentially, liability for debts also extend to the banks which have previously financed the now insolvent business. Even though their role is confined to supporting businesses by providing finance rather than being involved in their active management, banks can also fall into the quasi arena of being a director, or a shadow director. This is especially the case if the bank in question dictates the financial control of the company, specifying who should and should not be paid. Therefore, banks can also be personally liable in addition to those directors who are listed by Companies House.

The essential raison d’être of English company law is designed to preserve the integrity of a company as separate legal entity, separate from its shareholders and directors, conferred with rights as well as being subject to certain duties, obligations and responsibilities. Actions taken to lift the corporate veil arguably undermine the essence of what the law was originally designed to achieve.

In terms of insolvency, caution is therefore necessary. Directors, banks and those who are managing companies but who may not be directors, need to be aware of the available shields of protection. If they are not, they could face personal liability following a company’s collapse and have to pay for the price, even though fault may lay entirely elsewhere.




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