Insurance cover is provided for claims arising out of actual or alleged breach of trust, breach of duty, neglect, error, omission, misstatement, libel, slander, breach of warranty of authority and wrongful trading. Furthermore, Directors & Officers Liability Insurance also protects the value of a director’s personal holding in the company by covering the substantial expense of funding its own defence.
The legal environment for directors and officers in the UK is becoming increasingly hostile. In recent years, both the government and shareholders have become more willing to bring actions for breach of duty against directors and officers of companies.
As a director or officer of a company, you should consider the following:
Legally, the directors of a company and the company itself are separate entities and so may both be defendants, separately or jointly, in any legal action or prosecution.
Directors and officers of companies and other organisations have various duties, responsibilities and powers in connection with their position. Director’s duties are set out in a combination of case law and relevant sections from various statutes and regulations.
Consequently, directors and officers can be held responsible for a range of issues including:
Directors are often unaware of what their duties are. Ignorance is no defence.
The following examples highlight the importance of directors and officers liability insurance.
In October 1997, two motorists were killed after a company driver fell asleep whilst driving for a haulage company. The court held that the operations manager should have ensured that his driver adhered to the relevant driving regulations and also that he had failed to keep in close touch with his co-director on these matters. Both directors incurred substantial defence costs before being convicted of corporate manslaughter.
Although acquitted on criminal charges the director faced a long civil case brought by the liquidator, whilst the Official Receiver simultaneously brought disqualification proceedings. The case centred on false accounting of invoices to a factoring company which had allowed the Company to continue trading whilst insolvent.
Two directors were held liable for payments made to another director shortly before the company went into liquidation. The creditors of the company successfully argued that they should take precedent over the director and were awarded £800,000. Directors have a fiduciary duty to take the correct course of action and as such should not profit from their position.
Three former directors of a company incurred substantial costs after they were fined by The Securities and Futures Authority for their respective roles in an aborted hostile take-over bid. Each director admitted that they had failed to act with due skill, care and diligence in their dealing with confidential information received in preparation of the hostile bid.
The director of a business that failed, with losses of £1.5m has been sued by liquidators. The director genuinely believed the firm to be profitable but the case was still found in the liquidators favour , due to the directors negligence in failing to ensure accurate financial records were kept.
All 14 directors of a privately owned business incurred substantial legal fees and were banned following a DTI investigation into company insolvency. Despite the fact that only two directors ran the business on a day to day basis, all 14 were found to be responsible for the books and records not being up to the necessary standards and for a lack of working capital.
Director Successfully Sued By Liquidators
Creditors Awarded £800,000 As Directors Profit From Their Position
Director Ordered To Pay £1,000,000+ For False Accounting
Directors Convicted Of Corporate Manslaughter
Imagine the scenario. You have spent the best part of your working life building up your business. Then, you receive a letter from a regulatory body, announcing you are being investigated and ultimately prosecuted for what you thought was a minor incident a couple of years ago.
Sounds like your worst nightmare but you would be surprised how true this matter really is. People are now more prepared and likely to sue. At the same time laws are becoming tougher and access to litigation becoming easier. Increasingly actions are being brought against both the company and the individual who made the initial decisions.
Under current legislation as a Company Director you can be held personally liable for your actions. Your company has limited liability, you have unlimited personal liability. Basically, all of your personal possessions and property that you have worked hard for at risk.