Given the increased enforcement by regulatory agencies I thought it would be useful to set out some key matters which arise due to the position of a director within a separately incorporated legal entity. What it means and how they may attract individual liability.
A company is a separate legal entity that cannot act on its own and it is a company’s directors who are generally responsible for the management of the company’s business. This encompasses not only the day to day running of the company’s operations but also the development and implementation of a long term strategy. A company’s directors have authority to bind it and complete authority to exercise all of its powers. The veil of limited liability provides protection to directors in that they will not generally be liable for the debts of a company. This relative degree of freedom is balanced by the many obligations placed on a company’s directors by company law which – if they are not complied with – could result in a director being prosecuted, fined or disqualified. As well as this, insolvency law sets out situations in which directors can face personal liability for the debts of an insolvent company. There are many more obligations and liabilities to be found in the general law including Health and Safety legislation, environmental legislation, the Corporate Manslaughter and Corporate Homicide Act, Bribery and Corruption laws and other areas as well as common law.
Definition of 'Director'
Section 250 of the Act defines a director as ‘any person occupying the position of director, by whatever name called’.
This broad definition is deliberate so that anyone acting with the power and authority of a director - whether that person has been formally appointed or not – can be made subject to the duties and liabilities imposed on directors by the Act. Individuals holding themselves out as a director and acting as a director without having been formally appointed are known as ‘de facto’ directors and are subject to the same duties and responsibilities as a director who has been properly appointed.
Some companies may give titles to senior executives that include the word ‘director’ where those individuals are not actually directors of the company. This may be intended to enhance the individual’s status but is misleading and should be avoided.
‘Shadow director’ is defined in section 251as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. The difference between a shadow director and a de facto director is the element of deceit involved in attempting to avoid the duties and liabilities of directors by not being formally appointed as one. Shadow directors give rise to issues of transparency and accountability as anyone dealing with a company may not be aware of their existence and influence over the company’s business. There can be consequences for individuals who are found to be a shadow director, particularly in an insolvency situation, where such individuals could be held personally liable for contributing towards settling the company’s debts in the same way as any other director.
“If somebody in a company, who can be, for example, a Sales Manager as titles go, regularly gives advice to the directors of the company, who then customarily act in accordance with that advice, that Sales Manager becomes a shadow director in the eye of the law, and will bear the grunt of all directorial responsibilities and liabilities”
Institute of Directors, November 2009
The directors of a company may delegate any of their powers to a particular individual or committee (none of whom need also to be directors) to whatever extent, with regard to whichever matters and on whatever terms they think fit. It should be noted that whilst powers may be delegated in this manner, duties and responsibilities may not and such delegation does not absolve the delegating director of responsibility. While directors may be entitled by a company’s articles to delegate functions to others, they must therefore still supervise the tasks that have been delegated. Ultimately, responsibility remains with the delegating director. It is advisable that the exact details of any such delegation of authority is properly noted in the records of the board meeting at which the decision to delegate was approved.
Health and safety
Under section 37 of the Health and Safety at Work Act 1974, an individual director can be held criminally responsible where the company itself is found guilty of breaching health and safety law and the offence in question was committed with the consent or connivance of, or was attributable to any neglect on the part of, the director. Any director found guilty under section 37 can be disqualified from acting as a director for up to two years under section 2(1) of the Company Directors Disqualification Act 1986, as well as being subject to any fine imposed by a court.
In addition to the above, an individual director, as an employee of the company, can also be held criminally responsible for a health and safety offence under section 7 of the Act where he fails to:
- take reasonable care for the health and safety of himself and other persons who may be affected by his acts or omissions at work; and
- as regards any duty or requirement imposed on his employer or any other person by or under any of the relevant statutory provisions, co-operate with him so far as is necessary to enable that duty or requirement to be performed or complied with.
An individual director can be criminally liable for manslaughter when he or she causes a death through recklessness or negligence. For this offence to be established, the following elements have to be satisfied:
- that the director owed a duty of care to the deceased;
- that the director breached this duty;
- that the breach was so bad that in all the circumstances it amounted to a crime.
Although prosecutions against individual directors for manslaughter are difficult to pursue, there has been an increasing number of such cases. This trend may continue particularly because the Corporate Manslaughter and Corporate Homicide Act 2007, while imposing liability on companies, does not apply to individual directors despite focussing on their “collective failures”. A director found guilty of manslaughter by gross negligence can be disqualified as a director for up to 15 years as well as any sentence imposed by a court. It should of course be borne in mind that, while the Corporate Manslaughter and Corporate Homicide Act does not impose liability on individual directors, a conviction for corporate manslaughter could devastate a company’s business as well as the reputation of those that are responsible for running it.
In the event of an accident or investigation Directors should always be clear about their internal role and possible individual responsibilities but must understand that at the end of the day they hold a position in a company which is both a benefit and a burden and if they are unclear then in the event of an incident or investigation they must take their own legal advice.