Limited Liability doesn’t mean a Director has no personal liability

Many directors of limited companies believe that they have no personal liability in respect of their actions on behalf of the company.

They are mistaken!

One of the company law’s basic principles is that a limited company’s personality is distinct and separate from its controllers.  Accordingly any liability incurred by the company is limited to the company.  It does not extend to the company’s shareholders or directors.

However, there are instances where this protection can be eroded. Personal claims or proceedings against directors or officers can arise from any decision made, or act carried out, in the workplace however innocuous it may have seemed at the time.

These can be official investigations and claims and proceedings where personal liability can be involved also typically include:

• Actions brought by liquidators, where they suspect wrongful trading or incorrect payments to creditors
• Actions brought by HMRC where insolvent trading or misappropriation of tax payments is suspected
• HSE investigations where negligence is suspected
• Police and SFO investigations where fraud is suspected
• breach of directors’ duties under the Companies Act 2006; and derivative claims. The company itself, shareholders or regulators may bring these sorts of (i.e. generally) claims.

Although limited companies (the corporation) are required by legislation to have employers and public liability, the individuals within the company, directors and managers are very often unprotected. The legal definition of a director is reasonably clear but the legal definition of an officer is vague enough to allow claims or proceedings to be issued against people in almost any managerial or supervisory position.

You can insure against any potential legal actions by acquiring Directors’ and Officers’ Liability Insurance frequently referred to as D & O insurance

What are the benefits of D & O Insurance?

In the first instance it ensures you have direct access to practical advice from your insurer. If you talk to them at the first hint of trouble, they can often help you to defuse the situation; either minimising the risk of a frivolous claim being made, or by helping you to direct claims or proceedings towards the company rather than individual directors or officers.

However, should proceedings still arise, your directors and officers insurance will cover you from the legal costs and damages where actionable mistakes have been made, through to arranging and paying for legal representation throughout lengthy and expensive official investigations. Some policies can even arrange legal representation at a Police Station in the unfortunate event of a director or officer’s arrest.

If the director’s pure personal liability as an individual – as distinct from relating to alleged wrongful acts he has carried out on behalf of the company – is involved, then he will not be covered by the DO policy, eg in respect of personal guarantees, where he has been fraudulent or when the corporate veil is pierced. These would typically relate to:

• breach of trust
• breach of duty
• neglect
• error
• misleading statements
• wrongful trading

If this insurance cover is something you would be interested in, and it would give you peace of mind, you should contact your insurer or broker who will be able to advise you correctly.