At a glance
  • Director's of a limited company have many legal obligations
  • With so many possible ways to fall foul of litigation, Directors & Officers Liability Insurance shouldn’t be an after thought
18th March 2014

Directors & Officers have a responsibility to protect their assets

By law the director's of a limited company must:

  • try to make the company a success, using your skills, experience and judgement

  • follow the company’s rules, shown in its Articles of Association

  • make decisions for the benefit of the company, not yourself

  • tell other shareholders if you might personally benefit from a transaction the company makes

  • keep company records and report changes to Companies House and HM Revenue & Customs

  • make sure the company’s accounts are a ‘true and fair view’ of the business’ finances

These are only a few of the duties – there are over 200 possible offences that could give rise to a claim from the Companies Act alone, plus there is the Health & Safety at Work Act as well as Employment Law, to name but a few.

You can ask other people to manage some of these things day-to-day. For example, an Accountant can manage your accounts for you - but you are still legally responsible for them. And even though the company may have a limited liability, your own liability is unlimited and your personal assets are therefore at risk.

Even if you aren't a board member and are simply an investor, by investing in a company, you run the risk of finding yourself involved in litigation with unlimited liability. By investing your money, you can be considered to be a Shadow Director.

Recently, there has been a notable increase in global litigation against company Directors.

In fact recently, a case came to light in which an investor found himself included in such litigation, having to incur substantial costs, even though he did not hold a board position on the Investee Company. The Investor was actually passive and as such had no control over what his money was spent on, which is a fairly common scenario.

There are over 200 possible offences that could give rise to a claim from the Companies Act alone

His money was actually used to fund a lawsuit which the company ended up losing. As a result, the company went into liquidation so the claimants decided to go after the directors. They quickly realised that there was no money, until they dug deeper and discovered the investor. Seeing an opportunity, they therefore went after him personally.

A court decision upheld that as he had funded the company’s actions, he was deemed to be a shadow director. Despite his arguments that he had no involvement in the management of the company or its money, the court deemed that his money had effectively funded the lawsuit and so he was personally liable.

Whilst this is unlikely to occur often, it does highlight that there is an exposure, even for passive investors. And whilst unlikely to occur often, when an incident does arise, it can be very costly indeed. Of course, you could fight any such action, but to do that you would need to spend your own money.

There is a solution though, in the form of Directors & Officers Liability insurance.

Protection

Directors & Officers Liability insurance is often an after thought, when really it should be the first thing you buy. Policies provide cover for financial protection for the Directors & Officers of the company in the event they are sued in conjunction with the performance of their duties as they relate to the company.

It provides you with insurance for defence costs for claims brought against you personally. It also provides you with indemnity for financial loss resulting from your liability to pay damages that the court has ordered you to pay.

You may be confident that you will never face such a claim if the companies that you invest already have Directors & Officers Liability insurance policies in place. But it is worth noting that you are not necessarily included on their policy, especially if you are not an appointed Director.

Buying your own insurance is the only way to fully protect yourself

To give you an example of another claim that occurred in recent years, a Director signed a company cheque but omitted the word ‘Limited’. The cheque was not honoured and by the time the corrected cheque was re-presented, the company had gone into liquidation. As a consequence, the Managing Director, who was not the director who made the mistake, was held personally liable for the value of the cheque, which was over £30,000.

One theme which emerges from this and other examples is the potential for directors to be found to have been in breach of their duties for acts or omissions of the other directors of the company. This is because of a failure to act with “reasonable care, skill and diligence” as set out in the Companies Act 2006, which also stipulates that these duties apply to shadow directors too.

Why me?

You may be thinking, “but why would anyone bother suing an investor? There are “real” directors of the company that they could go after instead.”

But what if you as the investor are seen to have deeper pockets than the “real” directors? They may then see you as worth suing as well or even instead.

Would they be successful in such litigation? You may feel not. You may feel that it would be extremely hard to prove that you have been involved in the management of the company, or that your investment could be deemed influential.

You may feel confident that you have secured your personal assets so that they cannot be touched in the event of such a claim.

But is it worth taking the chance? Even if you can prove that you should not be involved in any such litigation, you are still going to have to spend your money defending yourself and it will take up your time, not to mention the stress that it would put you and your family through.

There is also the fact to consider that if one of the investee companies goes into liquidation, it could lead to director disqualification. Whilst you may only be investing money, your details are available in the public domain so it would be easy enough for you to be found. Of course you would be able to fight this, but it would again cost you money and could damage your reputation in the process.

You wouldn't leave your front door unlocked at night.

You wouldn't tell a stranger your PIN number.

You wouldn't leave your car parked with the door open and the keys in the ignition.

You wouldn't do any of these things because you want to protect the things that are most precious to you.

Directors & Officers Liability insurance gives you the protection and the peace of mind that you need in today’s increasingly litigious environment. Because, is it worth taking the risk?

Category:

Commercial