Directors’ Liability in the United Kingdom

General Duties

The Companies Act 2006 is the main source of UK law regarding the liability of directors. The general duties of directors, as set out in Chapter 2 of the Companies Act, are:

• to act within powers;
• to promote the success of the company;
• to exercise independent judgment;
• to exercise reasonable care, skill and diligence;
• to avoid conflicts of interest;
• not to accept benefits from third parties; and
• to declare interest in a proposed transaction or arrangement.

Additionally, the following historic duties under common law and equitable principles were not codified into the Companies Act 2006 but remain in effect:

• the duty of directors to inform themselves of the company’s affairs, to join with co-directors in supervising and controlling them, and to maintain a sufficient knowledge and understanding of the company’s business to be able to properly discharge their duties as directors;
• the duty of confidence; and
• the duty not to misapply the company’s funds by paying unlawful dividends.

The general duties apply to all persons occupying the position of director, regardless of their job title, including non-executive directors, de facto directors and shadow directors.

The general duties of directors are owed to their company. Most duties end when the directors leave the position, except the duties to avoid conflicts of interest in relation to property, information and any opportunity the director became aware of while they were a director, and not to accept benefits from third parties in relation to actions done or not done while they were a director.

Those general duties will encompass duties to ensure that companies comply with employment, health and safety, data protection and other regulation.

Insolvency

The Insolvency Act 1986 contains provision for directors’ liability in relation to wrongful trading and fraudulent trading. Again, the rules apply to executive, non-executive, de facto and shadow directors. In regard to wrongful trading, if a director knew or ought to have known prior to the start of liquidation or administration that there was no reasonable prospect that the company would avoid going into insolvent liquidation/administration, the liquidator/administrator can seek a declaration from the court that the director makes a contribution to the company’s assets. In regard to fraudulent trading, if a liquidator or administrator discovers that any business of the company has been carried on with the intent to defraud creditors, or for any other fraudulent purpose, they can seek a declaration from the court that anyone (not just directors) that was knowingly party to the fraudulent business make a contribution to the company’s assets.

As the general duties are owed to the company, the company can bring an action against directors for civil liability. However, actions directors for breach of their duties can also be brought by:

• the company itself, acting via its board of directors;
• the shareholders of the company, by way of a derivative claim on the company’s behalf under section 260 of the Companies Act 1986; and/or
• liquidators, creditors and contributories, by applying under section 212 of the Insolvency Act 1986 for the court to examine the conduct of directors and potentially order them to make a repayment or contribution to the company’s assets.

Applications for an order requiring a director to contribute to a company’s assets due to wrongful or fraudulent trading under the Insolvency Act 1986 can only be brought by the liquidator or administrator, though they can assign the right of action to another party, such as a creditor.

Derivative claims are increasingly being brought against directors by activist shareholders, a recent example being a claim by an environmental charity against the board of Shell UK for failure to take steps to comply with the Paris Agreement climate change targets.

The Companies Act 2006 contains law on certain criminal offences, such as the offence of fraudulent trading (covered as a civil offence under the ‘Insolvency’ section in the answer to Question 1), the offence of failing to declare interest in an existing transaction or arrangement, or the offence of failing to keep accounting records, among other offences.

It is also a criminal offence to act as a director while disqualified from doing so.

Data Protection

Under the UK General Data Protection Regulation, directors are responsible for ensuring a company processes personal data in accordance with the regulations, including having appropriate data protection policies and procedures in place. If there is a breach of the legislation, directors could potentially face personal criminal liability.

Health and Safety

Under the Health and Safety at Work Act 1974 and related legislation, directors owe duties to their employees and others who may be affected by their company in relation to health and safety. If a company breaches health and safety legislation, and the Health and Safety Executive considers the breach to have been committed with the consent or involvement of a director, or be attributable to the neglect of a director, the director and the company are liable for breach of the legislation. If a director is convicted, the maximum sentence is a 2-year prison sentence and/or disqualification from acting as a director for up to 15 years.

Where a work-related accident causes death, a director could be charged with gross negligence manslaughter, which has a maximum sentence of life imprisonment.

Bribery

Directors are also responsible for ensuring that nobody associated with the company, such as agents, employees, subsidiaries and suppliers, commits an offence under the Bribery Act 2010, by ensuring that adequate policies are in place to prevent any bribery offences. If a company is convicted of a bribery offence, its directors can be held liable along with the company if it can be shown that they consented to or connived in the bribery, which carries a maximum penalty of 10 years imprisonment and/or an unlimited fine, as well as potential disqualification from acting as a director for up to 15 years.

Environmental

A director can be liable for breaches of environmental legislation, such as carrying out an activity that requires an environmental permit without a permit, the unauthorised deposit of waste or failing to meet recycling and recovery targets, if they have committed the offence themselves or if the company commits an offence with the consent or connivance of the director, or if the offence was committed due to the negligence of the director. A director found guilty of an environmental offence can receive a prison sentence and/or unlimited fine and can be disqualified from acting as a director.

In general, criminal cases in relation to corporate law are initiated by the Crown Prosecution Service and the Director of Public Prosecutions. Other bodies that can initiate criminal proceedings include the Director of the Serious Fraud Office, the Environment Agency (or environmental cases), the Health and Safety Executive or local authorities (for breaches of health and safety legislation), and the Information Commissioner (for data protection cases).

It is also possible for a criminal prosecution to be brought as a ‘private prosecution’, under special rules set out in the Prosecution of Offences Act 1985. This enables a criminal prosecution to be brought (and funded) privately, where the authorities decline to pursue it, though the court may refuse permission for it to continue or the criminal authorities may take over conduct of the proceedings after they have commenced.

Limitation in most civil cases is 6 years from the date of the infringing act. However, where there has been a fraudulent breach of a fiduciary duty by a director, this 6-year period may not apply. For criminal cases, there is a 6-month time limit to bring proceedings in relation to summary offences, meaning a case exclusively in the Magistrates court. There is no limitation period for more serious criminal offences.

Directors’ and officers’ (“D&O”) insurance policies can be obtained by companies to insure their directors against liability relating to their duties, including claims for breach of their duties or negligence. All companies and directors would be well advised to take out sufficient D&O cover, which will give the directors assurance they will not face personal liability, and the company and its shareholders assurance that any claim can be paid without recourse to a director’s personal assets.

A noteworthy aspect of the insurability is that any action which is fraudulent, dishonest or criminal will usually not be covered (though a company can insure against the risk of fraud by a director or employee).

No, the Companies Act 2006 does not distinguish between executive and non-executive directors. Liability also applies to de factor directors and shadow directors as it does executive and non-executive directors.

In general, a holding company is not liable for the actions of a subsidiary, and therefore for the actions of directors of a subsidiary. However, a holding company can be liable for the actions of a subsidiary company, including the actions of directors, if the holding company had superior knowledge and expertise regarding, and control over, the subsidiary’s operations.