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Policy Matters - Unlimited Liability
Policy Matters - Article 1
The financial rewards associated with being appointed to an executive or non executive position bring additional personal liabilities.
In an ever more litigious society, Directors and Officers are being held accountable for actual or alleged wrongful acts, errors or omissions, including negligent advice, misrepresentation or improper disclosure.
UK statutory offences and recent European Law impose greater liabilities on directors and officers, with such legislation increasing the likelihood of legal action against them. Unlike a company’s liability, which could be limited, the liability of anyone occupying a position of responsibility within a company might well be unlimited and uninsured directors and officers could face the possibility of personal bankruptcy.
The courts regard the company itself and directors of a company as separate entities. That is why, in order to protect the personal assets of individuals and to cover the costs of their defence, Directors and Officers Insurance should be bought.
Directors cannot rely upon indemnities provided by the company as generally speaking such indemnities are void as they are incompatible with s.310 of the Companies Act 1985.
In a recent case, 14 directors of a private limited company were banned following the company’s insolvency and subsequent Department of Trade and Industry investigation.
Although only two directors ran the business on a day-to-day basis, all were found to be responsible for the books not being up to the necessary standards and for a lack of working capital. Considerable defence costs were incurred to defend the action against the directors.
The legal environment for directors and officers in the UK is increasingly hostile, with shareholders more willing to bring actions for breach of duties and regulatory bodies and government also looking to hold directors personally responsible for their actions.
The duties of a director are well established in statutes, regulations and case law which can be broken down into two main areas.
The duty of care and skill is a common law duty requiring directors to act with the care an ordinary person would take in the same circumstances on their own behalf and with the skill expected from someone with his/her ‘particular knowledge and experience’.
Fiduciary duty. A Director must act honestly, in good faith and in the best interests of the company and just ensure that he/she does not have any conflict of interest.
If a director is perceived to have failed in any of their duties, then a claim could come from any number of stakeholders, including creditors, shareholders, regulatory bodies, employees, auditors, liquidators, customers and suppliers.
The Companies Act has over 250 civil and criminal offences with which directors can be charged and other new legislation — including corporate manslaughter proposes increased sanctions against directors in the event of any wrongdoing. Actions against directors by the DTI have increased by more than 50% in the last four years and the budget for the Office of Fair Trading is expected to rise by over 60% in the next three years.
For Directors and Officers, also read Trustees and Governors and remember that non-executive roles probably carry a greater exposure by virtue of not having a day-to-day hands-on involvement in the business.
Not to mention the Company Law Reform Bill currently being debated in the House of Lords which requires Boards to consider the effects of their decisions on Employees, customers, the environment and local communities, as well as document the process.
The message has to be that — if you have not already done so — contact us to arrange for a directors and officers quotation as a matter of urgency. For Private Companies, protection is also available for the business itself.
For more information on the topic covered by this article please contact Richard Rampley via email or phone 01223 720 322.
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