A director who breaches the obligations and duties imposed on him by his office may be liable to compensate the company for breach of duty, may incur personal liability for the company’s debts, may also face criminal or civil penalties and may be disqualified from acting as a director. The position of the company director has never been the subject of more scrutiny than it is today.
The obligations imposed on directors by the law in the UK are wide in number. They may relate to specific types of business (for example, many specific rules are applicable to businesses in the financial services sector) or to the way the business is operated (for example, health and safety matters).
While many are familiar with the general duties imposed on all directors under sections 171 to 177 of the Companies Act 2006 (the 2006 Act), as well as the numerous other obligations imposed under the 2006 Act, attention also needs to be paid to the variety of other duties and obligations that other statutes and laws impose, the breach of which may also result in civil and criminal penalties. The below note seeks to highlight some of the additional obligations that directors need to be aware of to ensure compliance.
- Financial Services and Markets Act 2000 and the Financial Services Act 2012: impose civil penalties for the abuse of confidential inside information in connection with dealings in the company’s securities, for example, where a director discloses such information except in the proper performance of his duties or disseminates false or misleading information in relation to the company’s securities.
- Insolvency Act 1986 (IA): renders a director personally liable to contribute to the company’s assets if the company goes into insolvent liquidation where: (i) the director has failed to fulfil his duties properly, or at all, causing the company to suffer loss (section 212 of the IA); (ii) the company’s business has been carried on for a fraudulent purpose (section 213 of the IA) - if the directors knew that the company was carrying on business when there was no reasonable prospect of it ever paying its debts, the company will be treated as having carried on business for a fraudulent purpose (fraudulent trading is also a criminal offence punishable by imprisonment or a fine or both (section 993 of the 2006 Act)); or (iii) the director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation and the director failed to do everything that a reasonably diligent person would have done to minimise the potential loss to creditors (so-called ‘wrongful trading’) (section 214 of the IA).
- Criminal Justice Act 1993: it is a criminal offence for a director (or any other ‘insider’) to make use of confidential inside information in connection with dealings in the company’s securities or to disclose such information except in the proper performance of his duties.
- Fraud Act 2006: it is a criminal offence for a director to: (i) dishonestly make a representation which is untrue or misleading where he knows that it is, or might be, untrue or misleading; or (ii) dishonestly fail to disclose to another person information which he is under a legal duty to disclose. Both of the offences require the intention of making a gain or causing loss or risk of loss to another person.
- Bribery Act 2010 (BA 2010): created four criminal offences: (i) offering, promising or giving a bribe (section 1 of the BA 2010); (ii) requesting, agreeing to receive or accepting a bribe (section 2 of the BA 2010); (iii) bribing a foreign public official to obtain or retain business (section 6 of the BA 2010); and (iv) a strict liability offence for any company that fails to prevent bribery by associated persons acting on behalf of the company (section 7 of the BA 2010).
Where a company is convicted of an offence under section 1, 2 or 6 of the BA 2010 and that offence is proved to have been committed with the consent or connivance of a senior officer of the company, the senior officer as well as the company will be guilty of an offence (section 14 of the BA 2010). Section 7 of the BA 2010 is a strict liability offence for the company unless it can show that it has “adequate procedures” in place to prevent bribery. Therefore, the directors should satisfy themselves that there are such adequate procedures in place to prevent instances of bribery.
- Health and Safety at Work etc Act 1974: states that any offence committed by the company with the consent or connivance of, or attributable to any neglect on the part of, any director, manager, secretary or similar officer could lead to that person being prosecuted as well as the company.
- Company Directors Disqualification Act 1986: renders a director criminally liable, and potentially also personally liable for the company’s debts incurred as a result, if he acts in the management of the company while disqualified or acts on the instructions of someone whom he knows to be disqualified.
- Equality Act 2010: a director may be personally responsible or jointly and severally liable with the company where discrimination (direct or indirect), harassment or victimisation takes place because of a person’s age, disability, gender, sexual orientation, marital/civil partnership status, pregnancy, maternity, race, religion or belief, even where it takes place in the ordinary course of business or where authorised by the company.
- Environmental legislation: if an environmental offence is committed with the consent or connivance of, or is attributable to any neglect on the part of, a director, manager, secretary or other officer of the company, then that person (as well as the company) can be prosecuted.
- Data Protection Act 1998: it is an offence to knowingly or recklessly obtain, disclose or procure the disclosure of information without the permission of the data controller. Directors can be personally liable in the case of breaches which they consented to, or encouraged, or which can be attributed to their neglect.
- Competition Law: It is a criminal offence punishable by imprisonment or fine, for an individual, including a director, to be involved in anti-competitive agreements with competitors. This includes formal or informal arrangements regarding bidding or allocation of customers or markets, as well as more obvious anti-competitive conduct such as price fixing.
- Misrepresentation: In addition, directors may be personally liable for damages (i) if they make a fraudulent or negligent misrepresentation in the course of negotiating a contract between the company and a third party; (ii) under a contract if they fail to make it clear that they are contracting as an agent of the company and not personally; or (iii) to a third party for damages for breach of an implied warranty of authority if they conclude a contract on behalf of the company but exceed their authority in so doing.
The importance of directors’ duties cannot be overstressed. In the event of corporate failure, the actions and decisions of directors may be subjected to detailed scrutiny by creditors and liquidators. If the directors have not acted in good faith and in the best interests of the company or have failed to fulfil their statutory duties they may incur personal liability or even criminal sanctions.
Client Alert 2016-279