Buying directors’ and officers’ liability insurance can provide cover
Directors may be required to personally indemnify the company against losses from claims arising from the following circumstances:
Contracting personally – If a director enters into a contract with a third party without making it clear it is on behalf of the company, the third party may believe it is a personal contract. In the event of a dispute, the director may be held personally liable. This also applies if they sign contracts purportedly on behalf of the company before its incorporation.
Acting beyond company authority – As noted above, directors are limited to act within their authority as outlined in a company’s Article of Association. If a director exceeds that authority to the detriment of the company, they may be held personally liable to recompense the company financially.
Misrepresentation – If a director deliberately misleads a third party, who suffers financial loss as a result, they may be personally liable to reimburse those losses.
Bribery and corruption – The Bribery Act 2010, which came into force in July 2011, was extended to include all private sector transactions in addition to the previous public officials. Where a company is convicted of an offence of offering or receiving a bribe, directors can be held jointly liable with the company if they can be shown to have consented or connived in the bribery. If convicted, prison sentences can be up to 10 years plus unlimited fines.
Health and Safety – A Director who causes a company to breach health and safety law because of their consent or negligence can be personally prosecuted.
Serious Data Protection Breaches – If a company tries to avoid fines from the Information Commissioners Office (ICO) by closing the business down, the ICO might try and pursue the matter with ex-Directors (i.e. hold them personally accountable). This might be the case if the firm was involved with mass illegal phones calls or texts (i.e. nuisance communisations). Smaller, one off incidents are less likely to be pursued on a personal basis, and clearly if the business is still operating, any fines would be levied against it rather than individual Directors.
Fraudulent trading – Directors can be sentenced for up to 10 years in prison if found guilty of fraudulent trading, which is where they purposefully put company assets beyond the reach of creditors if they suspect the business is insolvent. If a director continues to trade with the knowledge that the company is insolvent, courts may order them to personally pay any assets incorrectly dealt with back to the company.
Disregarding court orders – A director can be held in contempt of court if they wilfully ignore a court order on the company, potentially leading to imprisonment.
Environmental breaches – A director can be held personally liable if they commit, or allow someone else to commit, an offence that breaches environmental regulations.
Manslaughter – Individual directors and managers are subject to prosecution under common law for manslaughter where 1) They owed, and breached, a duty of care to the deceased, and 2) The breach materially contributed to or was the cause of death, and was so negligent that it can proved they had a disregard for the life of the deceased. A conviction for gross negligence manslaughter carries a maximum sentence of life imprisonment.
Breach of Intellectual Property Rights – Where a director arranges or allows someone to infringe a third party’s Intellectual Property rights, they can be personally held liable to pay compensation.
Anti-competitive behaviour / price fixing – A director can be imprisoned for up to five years if found guilty of causing their company to enter into cartel agreements involving price-fixing, limiting production or supply or influencing bidding processes.
Mandatory trading disclosures – Directors can be fined if the company fails to comply with, or make trading disclosures required by, The Companies (Trading disclosures) Regulations 2008.
Acting while disqualified – A director can be held personally liable if they act in the management of the company while disqualified, or acting on the instructions of someone else who is disqualified.