It is a common scenario for directors not to be aware of the extent of the personal risk that attaches simply because of the senior role they hold within their company. This often stems from a lack of understanding or awareness of the legal responsibilities attached to their position. Directors can inadvertently open themselves up to personal risk, including criminal liability.
Often, directors assume that their role automatically shields them from personal liability due to the size of the organisation or perhaps because it is a limited liability company, not realising that ignorance of or failure to comply with legal obligations can still lead to personal consequences, including criminal charges.
It is prudent to find out if your company’s Articles of Association include any indemnity for directors or whether the company has Directors’ and Officers’ liability insurance.
As a priority, a director must be fully aware of the statutory and fiduciary duties of their role. Whilst claims for wrongdoings committed by the company should be brought against the company as a distinct legal entity, the following are common instances in which Directors may also face personal liability:-
Breach of Directors’ duties – The Companies Act 2006 provides seven core statutory duties placed on directors:
(i) To act within their powers;
(ii) To promote the success of the company;
(iii) To exercise independent judgment;
(iv) To exercise reasonable care, skill and diligence;
(v) To avoid conflict of interest;
(vi) To not accept benefits from third parties; and
(vii) To declare interests in proposed or existing transactions.
If a director breaches one of the above duties, the company can take legal action against the director. Perhaps even more concerning for the individual, however, is the fact that some breaches are considered a criminal offence, which could lead to disqualification, fines, a criminal record and imprisonment. Directors must be fully aware of their legal duties and the responsibilities of their role. Diligently documenting key actions and decisions and ensuring clear minutes of board meetings are recorded can be crucial in recording compliance with directors’ duties.
Consent, Connivance, or Neglect of a Director – Where a Company is found to have committed a health and safety offence, Section 37 of the Health and Safety at Work Act 1974 states that its directors or senior managers can be prosecuted if the offence was due to their consent or connivance or attributable to their neglect. Documenting the reasons behind why a director considered certain decisions to be in the best interests of the company could be crucial in the event of a regulatory investigation into breaches that have occurred.
The test for acting in the best interests of the company is subjective. It requires that the director act in good faith and in what they believe to be the best interests of the company. Being able to show that they exercised their powers diligently and thought behind the exercise of their duties can add considerable weight to any challenges they face.
Failing to Act in The Best Interests of the Company or its Creditors – Once a director ought to conclude that there is no reasonable prospect of the company avoiding insolvency, they have a duty to take action to act in the best interests of the company’s creditors and minimise any losses to them. Maintaining good corporate governance and acting in the company’s best interest are essential to avoid claims of wrongful trading, misfeasance or related offences.
Entering into personal guarantees – There are many scenarios where directors unwittingly accept personal liability by offering personal guarantees, thus making themselves accountable. It should be noted that pursuing an individual is often easier than taking action against a company. Directors should take care to ensure that they always sign on behalf of the company and not within their personal capacity unless legal advice has been obtained to limit personal exposure.
Companies House filings – Whilst failing to keep Companies House updated with all relevant changes to the company may seem like an administrative oversight, it can lead to personal liability. Directors are responsible for ensuring that the company meets its statutory obligations; failure to do so can result in fines, penalties and personal liability, particularly if creditors suffer as a result. One way in which directors can mitigate liability arising is to delegate the preparation of such accounts to a financial adviser. This will not eliminate responsibility entirely, however, as director approval must be sought prior to filing, and knowingly or recklessly delivering false or misleading information to Companies House is a criminal offence which can, again, lead to fines and/or imprisonment.
Summary
The circumstances where personal liability may arise are not limited to just those mentioned within this article. If you find yourself at risk of personal liability as a director in respect of a company’s affairs then it is vital that you seek urgent support. For further information or to obtain legal advice, please contact our team.
Disclaimer: This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances.