Company Directors and Employment Law
Employment Solicitor Martin Malone discusses the frequently overlooked duties and potential liabilities of employees who are also company directors.
If you would like any further information regarding employment law, please complete our short enquiry form below;
There is undoubtedly a certain cachet which goes with the title of "director". For many, the status which attaches to such a title is of considerable significance. However, what is less frequently considered is the extent of obligations which accompany company directorship.
Job Title or Office Holder?
First it is necessary to distinguish between those who are described as directors and those who are in fact company directors. It is fairly common for sales staff to be conferred with the appearance of seniority by being described as "sales directors" although, in fact, they are not directors of the business per se.
In this instance we are concerned with those who accept a formal offer of directorship so that they are recorded at Companies House as fully fledged directors of the limited company.
Although the concept of limited liability is intended to provide that the exposure of a company and its shareholders is limited to the value of its share capital, in the modern corporate environment, company directors have significant responsibilities and corresponding potential liabilities.
On taking office, directors generally assume responsibility for management of the company's affairs on a day to day basis. In this context all directors owe a duty of care to carry out their functions with reasonable care and skill and, most significantly, he or she is ultimately answerable for the acts and defaults of all those who act on behalf of the company including its employees. Consequently, the step from employee to employee director extends considerably the scope of that obligation. In practice, the duty requires directors to act as a reasonable person would do if looking after their own business.
There is also a duty to act in good faith which, in practice, means that directors should treat all shareholders equally, should avoid conflicts of interest, must declare any conflicts of interest, must not make personal profits at the company's expense and must not accept benefits from third parties.
Particularly important is the duty of a company director to obey the relevant law and that includes preparing and filing proper accounts at Companies House as well as ensuring that the company's annual return is prepared and filed on time. Directors also have specific duties which attach to health and safety, employment law and tax. Failure to comply with relevant companies legislation can incur not only civil but criminal liability and the recent upsurge in corporate manslaughter claims is a timely demonstration of the extent to which such obligations can impact on a director as an individual.
Taking into account the economic downturn directors also need to be alert to the exposure to potential personal liability arising from fraudulent and wrongful trading. While most people would realise that activities which are classified as fraudulent will carry with them significant personal liability, the position is perhaps less clear and certainly less well known when it comes to "wrongful trading" under the Insolvency Act 1986. Wrongful trading arises when directors of a company have continued to trade that company when they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and they did not take every step with a view to minimising the potential loss to the company's creditors. Significantly wrongful trading does not require any intent to defraud in order to be established. Such a claim is brought by the company's liquidator and there has been a marked upturn in the number of wrongful trading claims being brought in the last few years.
Other issues connected with company insolvency which need to be considered by directors include the restriction of re-use of company names and director disqualification. Many bemoan the corporate regime in the UK which allows companies to be placed into insolvent liquidation only for the insolvent company's directors and shareholders to set up a virtually identical business but having unloaded the creditors' claims. However, section 216 of the Insolvency Act provides that if directors set up such a business with the same name or a confusingly similar name within a period of five years from the liquidation of the prior business and whether or not through a limited company they commit a criminal offence and they are also exposed to personal liability for the debts of the company which are incurred during the period of their involvement. There are lawful ways to get round this potential problem but they require careful planning and particular arrangements.
Company director disqualification is another important consideration for all company directors including employee directors. Disqualification orders prevent a person from acting as a director of a company or taking part, directly or indirectly, in the promotion, formation or management of a company for a fixed period. As such, they can operate to prevent executives from being able to take up senior positions which might require the holding of a directorship and will more than likely operate as a bar as a result of the requirement to avoid participation in the management of a company. Disqualifications can result from failure to comply with general requirements set out in the Companies Acts, wrongful trading, failure to comply with filing requirements under the Companies Acts and unfit conduct in connection with insolvent companies. Disqualifications run from 2 to 15 years according to the seriousness of the misconduct and are dealt with by proceedings which are normally brought in the High Court and can often be very expensive. Directors can short circuit such proceedings by agreeing to periods of disqualification but disqualification brings with it publication of the director's details in a public register which is accessible from the Companies House website and also shows up in credit and similar searches. Those who are found to have been involved in the management of a company during disqualification can face criminal proceedings.
The need for Specialist Advice
So, these are just a few examples of the significant obligations and corresponding issues which can arise for all company directors. I find it remarkable how many employees accept company directorships without having obtained legal advice concerning the terms offered and in particular the ability of the individual concerned to discharge his or her obligations as a director. It is commonplace for executive contracts and service agreements to include provisions for the executive to act as a director of a company for the duration of employment. However such agreements are frequently silent when it comes to the employee director's participation in the management of the affairs of the company so that in practice there is not even the right to access relevant management information so that the employee director is left entirely in the dark let alone having the ability to discharge his duty of care.
Similar problems can arise in terms of obligations relating to the acts and omissions of the company and its employees so that an unprepared director can find sudden exposure to court proceedings and potential personal liability without having had any direct knowledge or practical connection with the circumstances leading to such claims. Perhaps the most well known phrase heard in this context is "I had nothing to do with it - it was left to...". As I have indicated, such an approach is of little or no assistance for a company director who has (wittingly or unwittingly) assumed direct responsibility for a wide range of such obligations.
At Canter Levin & Berg Solicitors we have a great deal of experience in reviewing executive service agreements with particular reference to the rights and obligations of company directors. We also have specialist experience in dealing with company director disputes which, in practice, can often lead to bitter and very expensive litigation. Our approach is to ensure that employee directors have appropriate rights and protections from the outset so that there is a clear understanding on the part of all concerned.
Specialist Advice and Representation
We have a great deal of experience in dealing with complicated employment law issues. Canter Levin & Berg has been providing advice to employees for over 30 years so we've seen and dealt with most employment scenarios.
Our Employment Law Solicitors offer up to 10 minutes free initial legal advice over the phone, so call us now on 0151 239 1000 or contact us through this website and we will call you back.