Are you liable as a director during commercial litigation?

Being a company director is a position that comes with power, but with power comes great responsibility.

A company director is bound by a duty of care towards the company.

Although the director has responsibilities towards the stakeholders, they must also consider the interest of the stakeholders, such as its employees and creditors.

The Companies Act 2006 sets out a minimum requirement of competence and experience necessary for any director.

As a director, you must:

• Promote the long-term success of the company
• Act within its constitution and powers
• Exercise independent judgement, reasonable skill, care and diligence
• Avoid situational conflicts of interest
• Avoid accepting benefits from third parties
• Declare any direct or indirect personal interest in any proposed company arrangement or transaction.

You must also consider any likely long-term consequences of decisions you make, and take the interests of company employees into account.

Directors must recognise the need to foster the company’s business relationships; and the impact of the company on the environment and community.

As a director, you must act fairly, and look to maintain the reputation of the company for high standards of business conduct.

You also have legal obligations apart from those that come under company law. These cover the following areas:

• Employment
• Health and Safety
• Insurance
• Tax.

The shareholders delegate the day-to-day management of the company to the director.

Normally, a board of directors will take decisions collectively, and a director cannot act on their own unless only one director has been appointed. The company’s articles should define the director’s role and powers.

Being employed as a director does not automatically give you executive powers. You must have these specially delegated to you.

If you are a managing director, normally, you would have extensive powers to take day-to-day decisions on the company’s behalf.

You could be held personally liable for losses that have resulted from illegal acts, or from you acting beyond your powers as a director. You could also be held personally liable for losses that have come about because you have failed to use sufficient skill and care.

If you allow the company to trade while it is, or is likely to become, insolvent, then you could be held personally liable.
Personal liability can also apply in these instances:

• If the company does not comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008, and fails make required trading disclosures under them
• On contracts, you sign on behalf of the company, before its incorporation
• If you act in a managing capacity while disqualified as a director, or on behalf of someone else who is disqualified
• For damages, if you make a fraudulent or negligent misrepresentation in the course of negotiating a contract
• Making a false statement to shareholders or creditors about the affairs of the company
  For wrongful or fraudulent trading under the Insolvency Act 1996, or if you are knowingly party to defrauding creditors or for any other fraudulent purpose.

Many directors comply with the requirements of the Companies Act 2006, but even directors who do may end up falling foul of the law.

They can end up facing personal liability for legal issues that someone else’s mistake has caused. This is simply because of their position as a director. There is also the rise of blame culture, and an increasing trend to want to find an individual personally responsible when there has been a corporate error or wrongdoing.

Many directors comply with the requirements of the Companies Act 2006, but even directors who do may end up falling foul of the law.

They can end up facing personal liability for legal issues that someone else’s mistake has caused. This is simply because of their position as a director.

There is also the rise of blame culture, and an increasing trend to want to find an individual personally responsible when there has been a corporate error or wrongdoing.

There are several common instances which lead to directors being held personally liable in commercial litigation cases.

These include but are not limited to:

• Breaches of duty – where a company brings a claim against one of its own directors because the director has breached their duty to the company and caused it loss
• Personal or secured guarantees – where a director has been required to personally guarantee loans to the company to reassure the lender, and then the company has been unable to pay
• Shareholder agreements – the company may use shareholder agreements which outline that the director must contribute to assets or security for the company debts, for which they are personally liable
• Unpaid shares – if a company is insolvent or wound up, the director may be called upon to pay any outstanding share amounts for which they are personally liable
• Misrepresentation – where a director makes a statement that they know to be untrue, as a director, to another party, they may be held responsible for any subsequent financial loss
• Contracting personally – if a director does not make it clear they are acting on their own behalf and not the company’s when arranging a deal
  Ignoring court orders – if the company ignores court orders that the director knows of
• Breaching data protection – where the company commits an offence under data protection law, and it occurred with the director’s consent
• Intellectual property rights – if a director permits or arranges the infringement of another person’s or company’s copyright, they can be held personally liable
• Wrongful or fraudulent trading – if a director carries on trading, even when they know, or should know, the company is insolvent, the court may order them to pay any assets back to the company personally

Directors can also face the potential of personal prosecution under the following:

• Health and Safety
• Discrimination and harassment
• Environmental issues
• Manslaughter

There may be occasions as a director whereby you decide to peruse commercial litigation in some cases, allowing the company to pick up the costs should you lose.

Where this is majorly the case, it is becoming increasingly popular for successful litigants to seek costs against directors personally.

There are various criteria which determine that the director can be personally liable:

• Where an individual has management responsibilities, such as the director of an insolvent company who has improperly caused the company to prosecute or defend proceedings
• Or where the individual controls the litigation or stands to benefit from it
• Where the individual has financed or maintained the legal action
• Or where they have caused the action.

The situations where directors are most exposed to personal liability are those cases where they have personally funded the litigation. This does not have to mean they are paying the costs directly, but they could just as easily be funding litigation indirectly by not drawing dividends or supporting it financially in some other way.

If, as a director, you are controlling the litigation to a greater degree, essentially instructing the company on your behalf, then you are more at risk from personal liability.

Generally, if you bring a claim which fails, rather than if you are defending one, then you are more at risk of having personal costs made against you. The weaker your claim, the greater the risk.

Courts tend to see a director’s personal investment in defending a claim as more legitimate than if they are prosecuting one.

If you are a director and also the owner of a limited company, you must make a clear distinction between your personal interests and those of the company.

If you conduct the business of the company and set it on a course that is for your own personal benefit, you could find that the courts are prepared to hold you personally liable for commercial litigation costs.