Company Director personal liability under the spotlight
Company Directors are facing the increasing threat of D&O litigation claims and the possibility of being personally sued.
The circumstances where a Director may be liable personally include acting in a personal capacity without the knowledge of the company’s board, or personally committing criminal offences or consented or connived with others to commit them.
The recent case Lifestyle Equities CV and another v Ahmed and another (7 May 2021) was an appeal to the Court of Appeal by the directors of a number of companies who had been sued for trademark infringement for clothing brands belonging to the “Beverley Hills Polo Club”, trademarks owned by Lifestyle Equities. The trial judge found not only the companies liable, but that certain Directors were also jointly and severally liable.
A Director will not be held liable if he or she is merely carrying out their constitutional role in the governance of the company such as voting at board meetings and by exercising their power to appoint other directors.
To be liable, the Director or shadow Director must be shown to have ultimate control of the company with the case (MCA Records Inc and Another v Charly Records Ltd and others (No 5): CA 5 Oct 2001) being used as the leading authority on Directors’ personal liability for intellectual property infringement.
In that case, the court discussed the personal liability of a Director for torts committed by his company and concluded that a Director will not be treated as liable with the company as a joint tortfeasor if they do no more than carry out his constitutional role in the governance of the company, for example, by voting at board meetings.
The case also highlighted that there is no reason why a person who happens to be a Director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if they are not exercising control though the constitutional organs of the company and the circumstances are such that they would be so liable if they were not a Director or controlling shareholder.
The Companies Act, 2006, sets out the general duties of company Directors in the UK. If you breach these duties the consequences can be severe, with the company, its creditors, or shareholders having the right to pursue you on a personal level for any losses they have suffered.
Directors & Officers Insurance is designed to meet the personal liability exposures which directors face with regard to managing a company and dealing with its corporate governance affairs. Even if the company has a limited liability shareholder structure status, it doesn’t limit the personal liability of the individual directors in respect of their wrongful behaviour. D&O policy wordings are split into sections and the most important section is known as ‘Side A`, which is to indemnify the director in a situation where the company cannot or will not do so for example due to it being insolvent or prohibited from doing so as per the articles. Side B is the section which allows the insurer to reimburse the company when it has indemnified the director for a wrongful act.
For public trading companies, the company can be protected also against securities litigation, via what is known as ‘Side C` coverage. Depending on the type of company, its profile of business, legal jurisdiction and exposure to claims, it is important for insurance buyers to give consideration to protecting company board directors with sufficient Side A insurance. This can include stand-alone Side A limits, in excess of the core company D&O aggregate limit.
W Denis Insurance Brokers has a dedicated ProFin team, based in London, that can offer specialist technical advice on management liability issues. To discuss this further with an expert at W Denis, please make arrangements with Richard Bowdidge on 0203 713 3982 or at Richard.Bowdidge@wdenis.co.uk
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