When can a director be held liable for negligence?

A company director talking to a lawyer.

Being the director of a company brings with it a lot of responsibility. This not only includes shaping a business’ strategy going forward, it also incorporates a certain duty of care for the business and all stakeholders. This includes employees as well as customers.

While limited companies do offer some protection, in some cases, directors and board members can be subjected to personal legal action. This raises the question, where exactly is this line drawn and can a director be held liable for professional negligence?

In this guide, we outline the roles and responsibilities of company directors. We then examine the circumstances in which directors can be held liable for negligence – specifically negligence in the role as a director, not negligence in the professional services offered by the company. This includes also looking at whether former directors can be held liable for negligence. Finally, we highlight what insurance policies can provide financial protection against claims of this nature.

What is the role of a director in a company?

It is the role of a company director to promote the success of the business in a way which best benefits its shareholders. However, as well as shareholders, directors are also responsible for the company’s wider stakeholders. This includes the business’ employees and trading partners, for example. For this reason, the role of a company director comes with a wide range of responsibilities. These responsibilities include:

  • Entering into contracts with clients and trading partners
  • Purchasing and/or renting business premises
  • Purchasing tools, equipment, materials and stock
  • Employing new members of staff.

However, these responsibilities must be used safely, ethically, and responsibly. If authority is abused, serious penalties can be applied to the business and legal action can be taken against both the company and directors personally. For example, if a director purchases a workspace that is not fit for purpose and is dangerous for staff, they could face a lawsuit. Similarly, the acquisition of unsuitable tools and equipment that put staff in danger could also be judged as negligence in the role as a director.

Why would legal action be taken against a director?

While personal legal claims against company directors are rare, they do happen. Some incidents that lead to litigation are clear cut. However, others can be committed without the director even knowing. Indeed, in some cases, a legal claim could be made against a director due to the actions of another employee under their command. For this reason, it’s vital all directors know exactly what can result in a claim and how to best avoid them. Below we look at a number of situations in which action can be taken against a director:

  • Certain company debts

While the limited liability company structure will usually protect directors from personal liability regarding company debt, there are exceptions. For example, a director can be found liable if they provided a personal guarantee for a business loan.

  • Bribery and corruption

Accusations of bribery or corruption can lead to personal lawsuits. Although legal action on these charges typically target the company as an entity, individuals can also be jointly held liable. This can occur if it can be proved that a director has consented or connived in an act of bribery. When convicted, directors can get up to 10 years in prison and face unlimited fines.

  • Misrepresentation

If a director is found to have misled a third party, they can be deemed liable. This is usually the case if it can be proved the director acted alone and the third party suffered a financial loss as a direct result of the deception.

  • Health and safety breaches

Directors can be held liable if they breach their health and safety duties. Although it’s more common for entire companies to be found liable, there are exceptions. For example, if a health and safety offence is committed with the explicit consent of a director, then that individual can be prosecuted. Under the Health and Safety at Work etc Act 1974 (HSWA), the offence does not even need to result in the harm of an employee to result in prosecution. The mere presence of the risk of harm is enough for a criminal negligence investigation.

  • Environmental breaches

As with health and safety breaches, entire companies are usually liable for environmental breaches. That being said, individual directors can be held personally liable if they allow an offence that breaches environmental regulations to occur.

Can a previous director be held for negligence?

Although rare, previous directors can be sued for negligence in their role as a director. The Companies Act 2006 enables small shareholders to take legal action against directors and former directors of companies. Prior to 2006, suing former directors for negligence in their role as a director was only possible if the business was in liquidation.

What is directors and officers insurance?

As the name suggests, directors and officers insurance policies are designed to protect a company and its board in the event a claim regarding a director’s decisions or actions is made. These policies protect the company as well as individual directors. This is because a high profile lawsuit involving an individual director can be costly - both financially and reputationally. When directors and officers insurance is in place, the company can be protected. In today’s business environment, many companies also require this form of insurance to attract top managerial talent. Without it, potential directorial candidates may be put off from applying due to the liability risks related to the role.

Here at Markel Direct, we offer comprehensive directors and officers insurance policies. From £5 a month, your business’ directors and officers can be immediately protected.

Business insurance from £5 a month