Personal Liability for Directors in Legal Disputes

Posted onFebruary 5, 2018

The article below outlines some common and potential instances in which directors may be held personally liable for legal issues, some of which may not be obvious, and some of which may arise solely by virtue of their office.

Whilst the company can indemnify directors against third party claims, and directors can apply for D&O insurance for certain issues that arise, and shareholders can potentially ratify a minor breach of duty, there are still many situations in which liability can attach to a director personally where insurance will not offer financial assistance and which cannot be ratified.

With both an experienced Commercial Litigation team and Criminal team attuned to the pressures of company governance and potential disputes, Saunders Law can provide peace of mind in helping avoid and contain disputes, investigations and fines.

If you are affected by any of the issues below, feel free to give us a call on 02076324300 to see how we can help.

Being a director is a position of significant responsibility, and imposes a duty of care in law to the company. There are minimum requirements of experience and competence that directors need to meet and some key duties are codified in the Companies Act 2006. Many directors duly comply.

However, even careful and conscientious directors sometimes fall foul of the law. Sometimes directors can face personal liability for legal issues, even if caused by someone else's mistake, solely by virtue of them being a director.

An increase in "blame culture", means litigation is often, and sometimes unfairly aimed squarely at directors. Sometimes legal battles are used tactically, even when there is absolutely no merit, to try and coerce directors into particular action, hoping they will want to avoid an expensive and lengthy dispute, especially in instances where the company, shareholders or insurers are unwilling or unable to assist.

Breach of duty

Some, but not all, director duties, are outlined in the Companies Act 2006, and include promoting the success of the company, using reasonable care and skill, exercising independent judgment and declaring interest in transactions by way of example.

Whilst breaches can potentially be ratified by shareholder resolution, but if not, a company can bring a claim against one of its own directors, if the director has breached their duties to it and caused the company loss.

If the director gains financially due to a breach, the director may have to account to the company accordingly.

Personal /secured guarantees

Directors are often required to provide personal guarantees in loans to reassure the lender that the debt will be paid, if, for whatever reason, the company is unable to pay. If that happens, the lender could enforce against the director's personal assets and property.

Entering a personal guarantee can potentially cause conflicts of interest between the director and company's interests which may need careful management to avoid breach of duty. A director may be seen to be biased on account of that personal liability.

Shareholder agreements

The company may use shareholder agreements which outline directors have to contribute to assets or security for the company's debts other than by an express personal guarantee, which directors remain personally liable for. If any part is unclear, early legal advice should be taken.

Unpaid shares

In the event the company becomes insolvent and wound up, the directors may be called upon to pay up any outstanding share amounts payable that they are personally liable for.

Misrepresentation

If a director makes a statement which they know to be untrue as a director to another party, and intends for that party to rely on the statement, and which they do to their detriment, the director may be personally liable for financial loss suffered.

Fraudulent misrepresentation can occur if it can be proved that the statement is made knowing it to be false, without belief in it, or being reckless whether or not it is true.

Contracting personally

If a director is not clear that he or she is contracting on behalf of the company in arranging a deal, and the other party is under a misapprehension the director has contracted personally and a dispute arises, the director and can potentially be held personally liable.

Ignoring court orders

If a company is subject to court proceedings and the company is ordered by the court to do something, and a director knows of the court order, but wilfully ignores it, the director may be held personally liable for contempt of court and potentially imprisoned.

Data protection breach

If a company commits an offence under the data protection law, and it can be proved the breach occurred with the director's consent, or on account of their negligence, the director may be guilty of an offence as well as the company. The ICO can levy a fine up to lb500,000 against the director personally.

Tort (civil liability for a wrongdoing)

If a director commits a tort, such as deceit (with intention to defraud) or negligent misstatement (a statement made negligently) in the course of company business, the director may be personally liable. If the director involves themselves with a company's wrongful activity which amounts to a tort, the director may be jointly liable.

Breach of Intellectual Property rights

If a director arranges or permits for another person or company's copyright or other Intellectual Property rights to be infringed, they may be held personally liable for redress, based on the value of the wronged party's loss.

Acting outside of company's authority

If a director has restrictions on the authority under which they act on behalf of the company, but exceeds that authority and something goes wrong, whilst the company might ultimately be held liable, the company might then seek compensation from the director personally.

Wrongful / fraudulent trading

If a director carries on trading when they realise (or should realise) that the company is clearly insolvent, the court may order the director to pay personally any assets improperly dealt with back to the company. The director's duty in insolvency shifts from the company to the company's creditors.

If a director purposefully and knowingly puts the company's assets outside of creditors' reach, this may be fraudulent trading, to which criminal liability can attach. Fraudulent trading and criminal sanctions can apply to directors outside of an insolvency situation. The maximum term for imprisonment for fraudulent trading is 12 months on summary conviction, or ten years for conviction on indictment.

Price fixing / competition offence

A director may commit a criminal offence personally if they cause their company to enter a cartel agreement which causes the company to be involved in price-fixing, limiting production or supply, sharing markets and influencing bidding processes. Imprisonment can be up to 5 years and / or a fine on conviction on indictment.

Health and Safety

Directors who cause a company to breach health and safety law, which arises from their consent or negligence, can potentially be prosecuted personally. An individual convicted of health and safety offences could be imprisoned up to 2 years and / or face unlimited fines. Fines are determined in accordance with severity of issues.

Discrimination / harassment

A director could be held personally liable for discrimination or harassment offences caused to an employee, together potentially with the company itself, depending on the circumstances.

Environmental issues

If a director has personally committed an environmental offence during the course of company business, or caused it to occur with their consent or negligence, they may be held personally liable.

Manslaughter

A director may be prosecuted for common law manslaughter if there was a sufficient duty of care between them and the deceased, and a breach of that duty materially contributed or caused the death, and if the breach is found to be grossly negligent.

Bribery

Directors can be held liable if they commit an offence for either giving or receiving bribes personally under the Bribery Act 2010. Imprisonment could be up to 10 years and / or unlimited fines for conviction on indictment.

Insurance / indemnities / loans for legal costs

Many directors are over-reliant on insurance and think they are covered for any eventuality. They think that either shareholders, the company or insurance will bail them out: unfortunately this is not always the case.

There are limits to which a company and insurance can protect a director from incurring personal liability.

The Companies Act 2006 outlines a company cannot indemnify a director against negligence, default or breach of duty, but offers qualifying third party indemnity provisions, (QTPIP), in which the company can indemnify the director for liability to a person other than the company; even that will not cover costs in criminal proceedings where the director is convicted, or civil proceedings where liability attaches. Insurance offers some hope of security, but is far from absolute.

A director can seek director's and officers' liability insurance (D&O), but this too can limit financial assistance if there is proven fraud or dishonesty, or if the litigation arose from an issue prior to the start date of the policy. Certain types of claims, such as arising from pollution, or property damage of bodily injury may be expressly excluded. It is not safe to assume that insurance will save the day, and early legal advice is essential.

It is clear that directors could be held personally liable for a host of issues. If you are a director with a current or prospective dispute arising from issues above, get in touch to see how we can assist.

Saunders Law has dedicated commercial dispute resolution and criminal solicitors with vast experience assisting individuals and business owners to resolve commercial and criminal disputes. We're well-known for our high-profile work and excellent client satisfaction.

Operating from offices facing the High Court in central London, we're ideally located to handle commercial litigation and criminal issues, including director liability issues.

For a free, no-obligation, initial discussion of how we may be able to help, please contact us on 02076324300