DLoUK - UK in General

Director’s Liability in a Company: UK

UK is one of the leading countries in company registration in the world. Directors are responsible for the management and decision-making of the company. They must do it in good faith and with due care. Directors act as the agent of the company, trustee of the assets of the company, and employees of the company as well. 

Civil and criminal liability- Under Companies Act 2006, various fiduciary duties have to be complied with by the director such as:

  • Comply with the constitution of the company and the powers allocated to him under that
  • Act in pursuance of the success of the company
  • Duties must be carried out with reasonable care, skill and diligence.
  • No benefits shall be taken by him from any third party
  • There should be no conflict of interest
  • Use independent judgment while making any decision for the company
  • If any interest of the director is existing out of the proposed transaction, it must be declared by the director to the company. 

In case of any breach of the above-mentioned fiduciary duties of the director, there can be civil action as well as a criminal sanction for it. So the director is under liability to comply with the fiduciary duties towards the company. 

The Companies Act 2006 introduced a new liability regime for untrue or misleading statements in a company’s reports. The director will be liable to compensate the company for any loss it suffers as a result of any untrue or misleading statement.

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Personal liability- it means that the director is liable personally to pay for losses arising due to his acts in the company and he might have to pay from his property to pay off the liability. Such conditions when a director is liable personally are as follow:

  • Environment-related issues
  • Health and safety issues
  • Employment matters
  • Consumer protection law breach
  • Bribery/anti-corruption matters

Other liabilities- several other liabilities can be arisen due to acts of the director which are discussed below:

File Information at Companies Houseall

The documents and updates related to the company have to be filed with the company house after a certain interval of time. The director is under obligation to keep a check if all the documents have been filed and ensure that these filings take place on time. The director is legally responsible for the accounts, records, and performance of the company. 

The director can be held guilty if he doesn’t comply with the obligation and he will have to pay the fine, maybe prosecuted or disqualified. Thus it is the legal liability of the director to comply with the responsibility. 

Data Protection

There is legislation related to data protection, its storage, disclosure, and destruction of personal data of the company and the director must comply with the legislation imposed duties.

In every company, there must be policies for data protection and its procedure. There are fines imposed on the director of the company in case there is any breach in the compliance of such legislation and policy.

The court can also hold the director personally liable for the non-compliance and impose criminal liability for the same because it harms the reputation of the company. 

Health and Safety

Employees and others such as contractors, visitors to their site, etc. get affected by the act of the director, and the director must maintain and comply with the health and safety regulations. This duty arises out of the Health and Safety Act.

Thus if there is any act committed in the company which harms the health and safety of the employee and others, it is presumed that it has happened due to negligence on the part of the director.

Thus the director of the company has to face proceedings for breach of the relevant health and safety regulations. Penalty for this non-compliance ranges from fine to imprisonment for up to two years. 

Under Section 37 of the Health and Safety at Work Act, 1974, it has to be proved that the offense has been committed by the company with the consent or connivance of the director of the company. 

If there is a fatal work-related incident, the director could have to face a charge of gross negligence manslaughter for which punishment may extend to a term of life imprisonment.

When Directors may get excused from the liability?

The director can claim in the court to exempt him from the liability imposed upon him by the company on the ground that the director has acted in good faith of the company. It becomes the duty of the director to convince the court that he acted honestly and reasonably in all the circumstances. The director can bring such a claim in court on his own as well. 

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Who can initiate proceeding against directors

The Company itself- the company has the right to sue the director and take legal action against him if there is any breach of fiduciary duty of the director towards the company. The company generally initiates proceedings against a director on the demand of shareholders.

Shareholders are the major stakeholders of the company and any breach of duty on the part of the director affects the shareholders’ rights. Generally, the shareholder does not have the right to initiate proceedings against the director.

Thus the shareholder approaches the company and the company initiates the further proceedings. The shareholder generally demands action against the director to seek the restitution of financial loss or damage caused to them due to the action of the director.

Shareholders of the company- in cases of derivative claims, a shareholder can initiate the proceedings. In the derivative claim, the shareholder brings the claim in the name of the company claiming the loss of the company and not their own.

This is how shareholders initiated indirectly proceeding against directors. The court must be convinced in such a claim that the proceeding is being initiated by the shareholder in good faith. 

Other directors of the company- when there is a board of directors in a company and a breach has been done by any one of the directors, other directors may initiate a claim against that one director. But such claims by the directors must also be made in the name of the company and to claim the loss of the company. 

Liquidator during Insolvency- if a company becomes insolvent and the director is found to be under breach of duty due to which such conditions have arisen, then the liquidator is under a duty to consider a claim against the director, and such claims are treated as an asset of the company. Such claims are pursued further and the benefits realized from them are used for the benefit of the creditors.

Insurance policy for directors

Under Section 233 of the Companies Act, a company is permitted to get their directors and directors of associated companies insured from the liability that may arise out of their negligence, default, breach of duty, or breach of trust about the company they are associated with as a director. 

Directors and officers insurance (D&O)- this insurance is taken by the company to ensure their directors if any liability arises in future out of the duties they have discharged as a director. The claims can be made for negligence, breach of duty, or any, other default on the part of the director.

The protection offered by the insurance companies includes the claims like claims by shareholders, official investigations, claims due to insolvency of the company, etc. But any fraudulent, dishonest, or criminal act of the director is not protected by the insurance policy of the company. A certain amount of consideration must be paid by the director against their potential liabilities. 

These policies operate on a claim made which means that the insurer is obliged to provide the cover at the time when it is claimed from the insurance company. They are not under obligation to provide cover at the time the act of negligence or any other default was committed.

These policies are generally offered on an aggregate basis which means that all the claims made over a specific period will be covered under policy from a single pot of money.

Specific director’s liability insurance- the company agrees to provide indemnity to the directors for the act committed by the director while managing the company. If a director makes any negligence while managing the company, the company takes the responsibility to indemnify the loss that occurred to the company due to such negligence.

It is taken only if the articles of the company allow it and not otherwise. So before getting this insurance, the director has to make sure that such insurance is allowed under his company’s article of association.

It is generally given by the company to provide peace of mind to the directors of the company. This reduces the need for D&O insurance. Although both specific director’s liability and D&O insurance can be taken to protect the balance sheet of the company. 

Conclusion

Thus a new statutory procedure for claims against directors has been introduced and directors are provided with wider indemnity provided as compared to earlier to provide the director’s peace of mind while taking actions and decisions while working in the interest of the company.

Any form of personal liability can only be imposed on the company if it is proved that the director has acted in bad faith of the company and extreme misconduct and negligence are there.

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