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BUSINESS SERVICES: Directors Liabilities

It is not just formally appointed executive directors who may have a liability to their company and third parties but also non-executive directors and those who allow themselves to be held out as directors.

Once it has been established who owes duties as a director under the Companies Act 2006, reference needs to be made to the Act and the common law rules that preceded it to establish the extent of those duties. These include an obligation to act in good faith and in the best interests of the company, having regard to the employees, the shareholders and the wider community amongst others. The director must also bear in mind the interests of creditors and must exercise an independent judgment whilst avoiding conflicts of interest. Obviously a director cannot accept a bribe but the obligation goes wider than that; a director cannot accept a benefit from a third party and, with standard Articles, a breach of this rule cannot even be authorised by the Board. These are but a few of the stated duties.

Duties also exist under other statutory provisions such as the Insolvency Act 1986, the Equality Act 2010 and various health and safety and criminal sanctions.

If there is a breach, then the company itself may take action against the delinquent director (although sometimes shareholders can claim through what is known as a derivative action).

The consequences of breach can result in a personal liability attaching to the director. For example, a director may be liable:

  • To the company for breach of general Companies Act duties
  • To the company and others for wrongful trading under the Insolvency Act 1986
  • To employees for discrimination
  • To employees and other under health and safety legislation
  • To those affected by environmental issues where legislation provides for personal liability including corporate manslaughter

 

In some cases a company may be entitled to indemnify a director in relation to the costs of defence but there are restrictions placed on a company being able to indemnify a director in relation to many potential breaches. No indemnity will be permitted for instance to protect a director against claims for negligence in office or for breach of duty of trust.

Of more practical importance is the ability of a company to purchase directors’ liability insurance which will cover most of the more common areas of potential liability.

Even if a director is exposed to a liability claim, where that person has acted honestly and reasonably then it may be possible to petition the court for relief from sanctions.

Quite apart from advising in general terms on liabilities and ways to avoid them, we will also assist when there is any question of a director being disqualified from office.