A company can be made liable for debts or an offence in numerous situations - and sometimes this liability can also be passed personally onto a director as well as other senior personnel.
In the event that a company commits an offence with the "consent, connivance or neglect" of a particular director, that director will also be found guilty of the offence. This is due to legislative provisions for health and safety, theft, fraud, and bribery which are designed to hold directors accountable for misdemeanours committed by their companies.
In this article, we will look at how different types of liability can be attached to an individual director, and some considerations for directors looking to protect themselves.
Consent, connivance and neglect
A director can be found to be personally liable for a company offence if they consented or connived in an illegal activity, or caused it through neglect of their duties.
Consent and connivance imply knowledge of the wrongdoing and either passively allowing it to continue (by, for instance, ‘turning a blind eye’) or actively encouraging it. The director will not be able to claim that they did not know the activity was illegal.
A director can sometimes be found guilty of neglect even if they had no knowledge of the illegal activity, but ought to have been aware of what was happening.
Misleading statements and fraudulent misrepresentation
Directors can sometimes be held civilly or criminally liable for making misleading statements or misrepresenting facts to parties such as investors, shareholders or customers.
To partially address this issue, an 'entire agreement' clause will usually be included in most business contracts. This prevents either party in a deal from relying on any pre-contractual information not found in the contract (such as oral statements, marketing claims or other sources).
An entire agreement clause can help to protect businesses and individual directors against accidental or negligent misstatements of fact but will not provide any protection against liability for fraud.
Fraudulent misrepresentation is when a statement is made and the person making it either knows it is not true, does not believe it to be true, or has a reckless disregard for whether it is true or not.
If a director makes a fraudulent misrepresentation with the intention that the other party will act on it, and that party goes on to suffer a loss as a result, the director could face individual liability for fraud.
In fraudulent misrepresentation claims, the claimant has the right to decide whether to bring the claim against the company or the director personally. Often this will be decided on which party has more money - so if the company is facing insolvency, the director can likely expect to the claim to be brought against them.
Generally speaking, in fraudulent misrepresentation claims the courts will seek to restore the claimant's position as it would have been if no fraud had taken place. In practice, this means rescinding the contract and/or ordering the payment of damages.
Protections against liabilities for directors
Naturally, company directors will be keen to seek protection where possible, from having to assume personal liability. Although it is possible for a company to acquire and maintain insurance for its directors against liabilities, section 232 of the Companies Act 2006 (“the Act”) specifically prohibits:
"Any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void."
The Act also goes on to state that any attempt to provide an indemnity to a director is also void (except in some specific circumstances).
Under normal circumstances, a director can personally assume liabilities arising from an investigation into the company for insolvency purposes, where the business was found to be guilty of wrongful trading (i.e. where a person who is or was a director of the company concludes, or ought to have concluded, that there is no reasonable prospect of the company avoiding an insolvent liquidation or, in relation to business conducted on or after 1st October 2015, insolvent administration but, nevertheless, the company continued to trade and losses to the company’s creditors were not minimised).
It is worth noting that liability for wrongful trading was recently suspended between March and September 2020 in light of the economic difficulties resulting from the coronavirus pandemic. This was implemented as part of the Corporate Insolvency and Governance Act 2020 in recognition of the difficulty in making confident business decisions when insolvency may depend on complete unknowns (such as lockdowns and being allowed to trade).
At the time of writing, the relaxation on wrongful trading liability has been extended for a further period between 26th November 2020 and 30th April 2021.
All company directors owe a duty of care to their company, creditors, and the public. Breaching this duty can lead to a claim for misfeasance.
Misfeasance relates to the misapplication, misappropriation, retention and accountability of funds or other company property. This could apply where, for instance, a director prioritises paying themselves while the company struggles to repay creditors, conceals assets from creditors, or shows preferential treatment when repaying one creditor over others.
Misfeasance may also apply to transactions at an undervalue where a director has sold a company asset at a price below market value in order to benefit (for example) a friend or family member. The transaction at an undervalue might also have taken place to avoid including the asset in insolvency proceedings.
As is the case with neglect, a director can be found guilty of misfeasance even if they are unaware of the rules (or the company's financial situation), as maintaining an awareness of the company's financial position is an essential part of a director’s duty.
If a claimant is able to successfully prove misfeasance, they can apply for a court order to restore their lost cash, assets or property. In addition to being held personally liable for the debts, the director in question can also be disqualified from the office of director for up to fifteen years.
Ultimately, avoiding personal liability as a director is a matter of upholding the duties set out in the Act.
If you have any queries or concerns regarding the extent of your duties as a director, or if a problem has arisen that could result in you facing individual liability for debts or being committed of an offence, please do get in touch with our Corporate legal team at the earliest opportunity, so you can receive the appropriate legal advice and expertise.