Topical Issues - Is Limited Liability a Myth?
Many company directors are under the impression that by running a Private Limited Company they have limited liability. This is not necessarily the case. There are a number of ways a director can be held personally liable with the consequence of severe financial penalties. Even if such allegations are unfounded, and successfully defended, the cost of the defence can be devastating to the individual.
Company directors may also be under the illusion, should they do something wrong, the company will pay for the defence and rectify their mistake. This may be possible but not every company, particularly if they are a small to medium size enterprise, can afford to do this - willing or not. The Companies Act also prevents the company from taking this action if the director is charged with either "a breach of duty" or a criminal offence. In other words, a director facing criminal charges because of negligence in implementing proper Health & Safety procedures will not be entitled to use company funds to pay for his/her defence. If subsequently acquitted, the company can in certain circumstances, refund the costs but again what small to medium business can afford to do this. Last year a case involving three defendants facing allegations for negligence involving the death of two employees cost over £900,000 in defence fees alone.
Public opinion has increased the pressure on the government to hold directors personally responsible and accountable for their actions. This is supported by organisations such as the TUC and the Centre for Corporate Accountability who presented evidence to the government select committee in 1999 that the vast majority of serious accidents went un-investigated and unpunished. Possible legislation is expected to affect over three million enterprises. With the stakes so high - jail sentences of up to twenty years - companies need to be diligent in implementing corporate compliance and risk management. They also need to be able to afford the best defence should the worst happen.
Even without this new legislation it is already possible to convict company directors but it is much easier to enforce the legislation on the small to medium size business sector than it is in big business. This is because it is easier to identify the "controlling mind of the company". Currently there are very few directors in jail for corporate manslaughter but those that are all ran small companies. Clearly this is something the new legislation is set to change but until it comes into force it is directors of the SME companies who have a greater exposure to the legislation.
It is not just in areas such as accidents and Health & Safety that directors have responsibility. Their duty is also to customers, staff, suppliers and even competitors with the Companies Act along creating over two hundred offences.
Trading while insolvent can result in directors being held personally liable for the debts of the company. Bill Fleming, the entrepreneur, was interviewed last year by Gordon Young of Unlimited Magazine about some of his personal experiences. He quoted "The sort of people who run their own businesses are not the sort of people who give up. They struggle in an effort to turn things around. But sometimes they don't. You cannot condemn them for trying. They are doing the wrong thing for the right reasons. And remember, the biggest loser by a long way is usually the entrepreneur".
People who run their own businesses will consequently fight to save them. Many will pull them through and hanging on by the fingertips and surviving will provide the entrepreneur with some unique and valuable experience but there is a real danger for those who do not survive that they will face consequences beyond the loss of their company.
There are many complex issues facing directors in a modern legislative society. Corporate compliance by the SME sector needs to be taken seriously or there will be increased consequences. Good corporate governance and risk management will significantly reduce the risks but they will not remove them completely.
One of the most under utilised insurance covers within the small to medium sized business sector is Directors and Officers Liability Insurance. Although the Companies Act does not allow companies to indemnify directors for all eventualities it does allow the company to purchase Directors and Officers insurance. Recent market research by a leading insurer showed that 85% of companies with a turnover below £10,000,000 did not buy this cover. The vast majority had never heard of it, possibly because it is a cover many brokers have little expertise in. Directors and Officers insurance is available to the vast majority of limited companies including new ventures. It is not expensive but there is a wide variety of policy covers, so for something with this level of importance it is absolutely necessary to look primarily at the cover rather than the price.
Directors liability insurance is a valuable method of protection for company directors for a great many reasons. Having such a cover in place is also to the benefit of lenders, shareholders, suppliers and any other outside party affected by the directors actions. As a result of this cover they have the opportunity to prove the case against the director knowing that there is the necessary resources to compensate them if they do so without the need for the company director to lose all of their own personal assets.
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