Whilst in practice it is still relatively rare for directors to face personal liability – its potential should not be ignored. Examples of where personal liability may arise include the following:
Fraudulent/Wrongful Trading
Under the Insolvency Act 1986:
A director is liable for trading for a fraudulent purpose or for money or property that has been misapplied and may be liable for debts of a liquidated company if the director knew or ought to have concluded that there was no reasonable prospect of the company not going into liquidation unless they have taken every step they ought to have taken to minimise loss to creditors
In deciding what director knew or ought to have known the court will look both the knowledge skill and experience which every director should have (the “objective test”) but, to any special knowledge, skill and experience that a particular director has (the “subjective test”)
Breach of Directors Duties
The Companies Act 2006 sets out a range of duties on directors for matters such as acting in good faith to promote the success of the company considering impact of decisions on other parties, communities and the environment; exercising independent judgement; exercising reasonable skill and care and maintaining confidentiality and allows a shareholder to sue a director in the name of the company for loss caused by their default.
To date these have not resulted in many claims due in part to reluctance by courts to “second guess” commercial decisions and the requirement to demonstrate lack of good faith and show that the action was designed to benefit the company rather than the shareholder.
Other Areas That May Involve Potential Personal Liability
Whilst we cannot be exhaustive other areas where a director may assume personal liability include acting outside scope of that director’s authority; entering into a contract personally rather than on behalf of the Company (possibly inadvertently) and of course entering into personal guarantees.
In addition there are a number of areas where civil and in some cases criminal liability may be imposed on directors (and senior employees) in addition to the company – these include:
• Breach of Health and Safety Law – see HSE Essential Principles
• Breach of Environmental legislation
• Bribery and Corruption .
• Breaches of the Companies Act
• Wilfully disregarding court orders on the Company
• Breach of Employment law including unlawful discrimination, bullying, harassment and seeking to suppress “whistle blowing”
• Certain tax liabilities in the event of company insolvency generally involving fraud/wilful default
• Corporate Manslaughter
And a wide range of sector specific failures in areas such as financial services etc.
Insurance
A company’s articles should always make provision for obtaining insurance to cover director’s (and senior officers) personal liability.
As with all insurance policies these will come with a range of conditions, qualifications and exclusions including in relation to dishonesty, conduct of claims and activities that are fall outside the scope of cover and so should be carefully reviewed. In general these should assist in mitigating and in many cases resolving many concerns directors may have. Indeed many directors may insist on such insurance being in place as a condition of taking up a directorship.
