Lifting the Corporate Veil

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When creating a limited liability company, you create a separate legal entity which can enter into contracts, purchase goods and render services. The company has its own legal personality and therefore responsibilities. When registering the company, a protection is provided to directors to preserve their personal assets. In other words, the directors of a company cannot be bound by, and are not personally responsible for, the company’s liabilities and obligations. If the company is sued, defaults a loan or is declare bankrupt, the officers’ personal assets are protected from the creditors. This is called the “corporate veil”.

However, this protection offered to the company’s officers is not guaranteed and the corporate veil can be lifted in certain circumstances. This can be done voluntarily, by the directors giving a Personal Guarantee to secure the company’s liabilities. This is commonly required as a part of a security package when the company is seeking a loan facility. If this is being asked of you, you should seek independent legal advice on the guarantee before proceeding so that you are fully appraised of the risks to you personally and surrendering the protection the corporate veil otherwise affords.

Piecing the corporate veil can also be a legal decision made by the courts in order to hold the officers for of the company responsible for its actions and debts. This is particularly where there has been some wrongdoing on the part of the directors; in particular in circumstances where the company is in financial difficulty. Wrongful trading, fraud, misfeasance and breach of fiduciary duties could all result in an order against you personally and an obligation for you to make payment out of your own pocket.

To keep the corporate veil intact, and protect or your own assets, it is crucial for you to keep your personal and business activities completely separate. Intermingling both is the most common way to pierce the corporate veil. You should also ensure that you always act with integrity when making decisions for the company, keep the best interests of the Company (including all of its members and creditors) at heart and if your company is in financial difficulty, seek independent advice from a qualified insolvency practitioner who can guide you on the steps you should be taking as a responsible director.

The above is not exhaustive and there are other circumstances where you may be personally liable as a director.

For more information on your duties and liabilities as a director, or independent legal advice if you are asked to guarantee your company’s liabilities, contact our Business Services Team on 01604 828282 / 01908 660966 or email BusinessServices@franklins-sols.co.uk.