D&O Insurance: What are your responsibilities as a company director?
Your responsibilities as a company director include you having the opportunity to shape the strategy and success of a business. This level of responsibility brings a high level of risk with it, and as such you must adhere to the rules to mitigate any potential risks and liabilities and ensure the success of the business.
It is important to be aware that your job title has legal implications, as well as responsibilities and accountability, and it is important that you do not overrate your position and put yourself in a position of risk unnecessarily. If you own a limited company, then you should call yourself a director. If you are sole trader you should call yourself the owner (1).
The Companies Act 2006 imposes certain general duties upon a director of a UK limited company, including:
- Duty to promote the success of the company for the benefit so of its shareholders, whilst considering the impact on employees, suppliers, customers/clients, communities and the environment.
- Duty to exercise independent judgement when making decisions for the good of the business.
- Duty to exercise reasonable care, skill and diligence.
- Duty to avoid conflicts of interest
- Duty to not accept benefits from third parties.
- Duty to declare interest in a proposed transaction/arrangement (2).
Company directors are responsible for keeping up-to-date records. There are restrictions on certain transactions, such as securing a loan from the company. Any breach of a directors’ duties could see a director held liable as an individual and/or liable along with their company, which is why Directors & Officers Insurance is important.
As a company director, who am I responsible to?
Your general duties are owed to the company you are a director of and to individual shareholders or other companies. It is the company itself that can take action against you if you have breached your duties.
Usually, proceedings against a director are made by the board, or by a liquidator of the company if it is in an insolvency situation. A shareholder, or group of shareholders, can also bring a claim against a company director for breach of duty on behalf of the company. This is known as a derivative action (3).
What penalties might a director face for a breach of general duties?
The options available to the company for a breach of duties by a director includes:
- An injunction
- Criminal fine
If a director discovers they have inadvertently acted in a way that breaches their duties, they might be entitled to some help, including:
- The breach of duty may be ratified by resolution of the company’s shareholders
- The court might grant relief if the director acted honestly and reasonably
- The company may have business insurance for its directors to help cover costs and limit their personal liability
- The company may offer to indemnify the director against the costs incurred in successfully defending a claim for breach of duties.
Why would someone take legal action against a director?
Legal action can be taken against the most conscientious of directors by virtue of their position, especially if someone under their command has made a mistake causing a financial loss.
Action can be brought against a company by someone who has suffered a financial loss, but if their claim against the company fails they may opt to sue a director personally (4). This can also happen if the company is no longer trading or if the claimant has a grievance against the individual rather than the company.
When do directors become personally liable for company debts?
Overdrawn directors current account – Company directors can take advantage of favourable tax rates on dividends. But if your company is struggling financially and you continue to draw dividends, the tax rate increases. As a result, because too little tax will have been paid, you as the director will become liable for an overdrawn director’s account which owes money to HMRC.
It is advisable to ask your accountant to explain the directors’ current account to you at the outset so you fully understand it and can avoid any tax liability.
Personal guarantees – Personal guarantees to secure loan funding mean a director will become personally liable should the company be unable to make the loan repayments. In some cases the lender can claim against a director’s personal assets and property.
Shareholder agreements – Shareholders agreements can insist directors by providing security for company debts for which they are personally liable.
Pension schemes –A company director can be held personally liable for a debt due under section 75 of the Pensions Act 1995 (5) in regards to the winding up of a pension scheme whereby they have been served with a contribution notice by the Pensions Regulator.
Fraudulent ways of accumulating debts – Accepting payment for goods which the director knows cannot be delivered, and obtaining finance using inaccurate information are two examples of accumulating debts fraudulently for which a director can be held personally liable (4).
How can you protect yourself as a director?
Many directors believe they have no personal liability, especially those who are new to the senior role. If you own your own business as a company director, then it is advisable to familiarize yourself with the rules. If a company has promoted a member of staff, then it is advisable as good practice to educate that member of staff as to their responsibilities and what is expected of them in the eyes of the law.
Directors, managers and supervisors can face allegations and legal proceedings it they have acted without proper authority or have breached the Companies Act 2006. Only shareholders have limited liability.
Directors & Officers insurance can provide cover for claims from creditors, employees, regulatory bodies, customers and suppliers. The policy offers protection for personal assets in the event of a claim of actual or alleged “wrongful acts” when acting within their managerial duties.
The cover provided under the D&O policy effectively provides peace of mind on the financial risk faced by directors and officers, giving them protection should an allegation or claim be made against them.
Considering certain investigations can cost thousands, can you afford to be without this type of insurance?
The role of the company director is not straightforward. To find out more detail about what is expected of you it is advisable to familiarise yourself with the Companies Act 2006, Chapter 2: General duties of directors.
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