How to Apply for Relief From Personal Liability as a Director

When a company becomes insolvent in England and Wales, directors may face personal liability for certain corporate acts - particularly where they have breached duties owed to the company or its creditors. Insolvency law recognises that business failure can arise from challenging economic conditions or unforeseen circumstances, and, in appropriate cases, the courts can grant relief from personal liability. This article explains when and how directors can seek relief, the legal basis, the procedural steps involved, and key considerations to bear in mind.

Why Relief from Personal Liability Matters

Directors of limited companies usually benefit from limited liability, meaning they are not personally responsible for company debts. However, in insolvency scenarios, specific statutory provisions can expose directors to personal claims. Common causes of personal liability include:

• Wrongful trading – continuing to trade when there was no reasonable prospect of avoiding insolvency. (§214 Insolvency Act 1986)
• Fraudulent trading – conducting business with the intent to defraud creditors or for other dishonest purposes. (§213 Insolvency Act 1986)
• Misfeasance or breach of fiduciary duty – misuse or misapplication of company property. (§212 Insolvency Act 1986)

In such cases, a director may be liable to contribute to the company's assets or face other enforcement actions. However, statutory and common law mechanisms can provide relief from liability, allowing courts to excuse a director's actions where fairness and reasonableness justify it.

Legal Basis for Relief from Personal Liability

1. Relief Under the Companies Act 2006 (Section 1157)

One of the primary mechanisms for relief is found in section 1157 of the Companies Act 2006, which permits the court to relieve a director from liability for negligence, default, breach of duty or breach of trust if:

• The director acted honestly and reasonably, and
• Considering all the circumstances, the director ought fairly to be excused.

This relief applies in a variety of contexts, not only insolvency, but it can be particularly relevant where actions judged to be a breach of duty were taken without improper motives and with reasonable care.

However, it is important to note that this relief is not available for wrongful trading claims because, by definition, wrongful trading involves conduct that falls below reasonable standards (i.e., continued trading when insolvency was inevitable).

Who Can Apply for Relief?

An application for relief can be made by:

• A director who is subject to a claim for breach of duty or fiduciary duty.
• A former director who faces an application for a contribution order after insolvency.

The application is made to the court, and it is a discretionary remedy - the court will consider the specific circumstances of the case and whether relief would be just and equitable.

When Relief Is Most Likely to Be Granted

Courts consider relief where a director's conduct, although technically in breach of duty, was honest and reasonable. Examples include:

• Decisions taken in reliance on professional advice that were reasonable at the time.
• Actions motivated by a sincere belief that they would benefit the company or its creditors.
• Errors arising from genuine judgment calls in difficult financial conditions where the director acted prudently.

In effect, the court balances the interests of creditors with fairness to the director, rather than applying automatic liability simply because a breach occurred.

How to Apply to the Court for Relief

Step 1: Identify the Grounds for Liability

Before applying for relief, the director must understand the basis on which liability has been asserted. Relief under s.1157 CA 2006 is typically sought where a claim alleges breach of fiduciary duty or negligence, rather than wrongful trading or fraudulent trading.

Step 2: Prepare Supporting Evidence

The application should be supported by:

• Detailed witness statements explaining the circumstances of the actions in question.
• Records and contemporaneous documentation (board minutes, advice obtained, financial reports).
• Evidence that the director acted honestly and reasonably given the information available at the time.

Professional advice obtained contemporaneously is often among the strongest evidence for reasonableness.

Step 3: Complete the Court Application

The application is made through the appropriate court (typically the High Court's Companies Court). Directors or their legal representatives submit:

• A claim form indicating the statutory basis (section 1157).
• Supporting documents and witness statements.
• Evidence of attempts to mitigate loss or act prudently.

Step 4: Attend the Hearing

The court will schedule a hearing. At this stage:

• The applicant director may provide oral evidence.
• Other parties (e.g., the liquidator or creditors) may oppose the application.
• The judge considers whether to exercise discretion in favour of relief.

Time Limits and Procedural Considerations

There is no fixed statutory deadline for applying for relief under s.1157, but practical considerations apply:

• In insolvency contexts, claims such as misfeasance and breach of duty often arise during or after liquidation investigations.
• Prompt action is advised once potential liability is identified to avoid unnecessary costs and protracted disputes.

Directors should also note that relief from liability in one context (e.g., breach of fiduciary duty) does not automatically protect against all statutory claims such as wrongful trading, which has its own legal boundaries.

Interaction with Other Relief and Defences

Professional Advice as a Defence

While not a statutory “relief,” evidence that a director obtained and acted on professional advice (from a solicitor, accountant or insolvency practitioner) in good faith can support applications for relief and defences to claims of negligence, misfeasance or breach of trust.

Limitation on Relief for Wrongful Trading

As noted, the specific statutory relief under s.1157 is not available for wrongful trading claims because the premise of wrongful trading is that the director did not take reasonable steps to avoid insolvency. For directors facing wrongful trading claims, mitigation options focus on demonstrating that they took “every step” to minimise loss once insolvency risk was obvious, which may reduce or avoid personal liability.

Practical Considerations and Risks

Financial Remedies and Damages

If the court refuses relief, directors may be ordered to make personal contributions to the company's assets or repay misapplied property. The amount is discretionary and depends on the severity of the breach and loss caused.

Disqualification and Enforcement

Insolvency practitioners report director conduct to the Insolvency Service, which may pursue disqualification under the Company Directors Disqualification Act 1986. A finding of breach of duty or misfeasance can be a factor in disqualification proceedings even if the director sought relief.

Common Questions About Relief from Personal Liability

What Is the Difference Between Relief and a Defence?

Relief under s.1157 is a discretionary allowance that excuses a breach, whereas a defence to claims like wrongful trading focuses on evidence that the director took reasonable steps to minimise losses once insolvency was inevitable.

Can a Director Apply for Relief Before Liability Is Established?

Yes. A director can apply for relief under s.1157 even before a claim is made, provided the circumstances justify such an application and prima facie liability exists.

Does Relief Protect Against Disqualification?

No. Relief from personal liability in civil claims does not prevent the Insolvency Service from pursuing disqualification proceedings where director conduct is found unfit under statutory criteria.

Key Takeaways

Directors facing potential personal liability in insolvency in England and Wales have access to relief mechanisms, particularly under section 1157 of the Companies Act 2006, which permits courts to excuse liability for breaches of duty where the director acted honestly and reasonably and it is fair to do so. The application involves preparing strong evidence of conduct, demonstrating reasonableness, and navigating court procedures. There are limits, especially in relation to wrongful trading, and directors should engage proactively with legal and restructuring professionals to support the application and mitigate risk.