Type: Client Alerts
In this first in a series of briefings on topics relevant to those involved in brownfield land, we look at the issue of directors’ and officers’ personal liability.
We are often asked to advise on the potential personal liability of a company’s directors and officers where contamination emanates from or has been identified at company land or where other potential environmental problems are identified.
As a general rule, the risk of directors and officers incurring personal liability for offences committed by their company is relatively low in the UK (in contrast with the position in many civil law countries).
However, of course every rule has its exceptions and the trend in director prosecutions is upwards, so the risk should not be ignored.
Derivative (or so-called “parasitic”) liability
It is important for all company directors and officers to be aware that, although such liability does not exist as a matter of more general company law, as a matter of environmental law there are provisions in most of the key UK environmental statutes1 that expressly provide for the parallel personal liability of directors and similar senior officers where the company is found guilty of an environmental offence.
The kind of corporate offences that have the potential to create directors’ personal liability include:
- Failure to comply with clean-up notices
- Pollution of water courses
- Carrying out regulated operations without the appropriate environmental permit
- Acting in breach of permit conditions
Such liability, where it arises, is criminal in nature; although insurance can be purchased in respect of directors’ defence costs.
However, it is fair to say that, at least in the case of all but the smallest companies (where risks are higher due to the degree of directors’ day-to-day control over and hands on involvement with physical operations), directors’ personal liability for corporate environmental offences is very much the exception, not the rule.
The need for personal fault
In all cases, the mere fact that a company is liable for an environmental offence will not of itself trigger parallel personal liability. A degree of individual culpability is also required.
The general rule is that a director (or similar officer of the company) will only be liable where the relevant offence is proved to have been committed with the consent or connivance of, or to have been attributable to any neglect on the part of, any director or other similar officer of the company or any person purporting to act in such capacity (which would, for example, include shadow directors).
According to relevant case law in this area, “consent” exists where a director/officer is well aware of what is going on and agrees to it, and “connivance” where the director/officer is equally aware of what is going on but his/her agreement is tacit (i.e., not actively encouraging what happens but letting it continue and saying nothing about it).
What is sufficient to make an offence “attributable to [the director’s/officer’s] neglect” is less certain; although it does seem clear that personal liability for neglect will only arise where a director/officer has failed in his/her own duties (as opposed to failing to prevent the company at large committing an offence) or failed to see that the law was observed once aware of a problem.
In practice, it is a question of fact and degree in each case whether the individual in question is in a sufficient position of control and guidance.
Direct personal liability
Obviously, if a director or officer of a company personally tips a drum of chemicals into a river or otherwise personally causes an environmental problem, he or she will be liable to be prosecuted for their own offences in their own right, just as any other member of the public would be, irrespective of their employment position.
However, such an extreme scenario is unlikely for most company officers, the more likely culprit being a less senior employee.
Duties to carry out remedial action
There is a theoretical risk that directors could be liable in their personal capacities to clean up contamination (or pay the regulator’s costs of clean-up).
It is a common misconception that the UK’s contaminated land regime makes it an offence to cause or knowingly permit contamination or own/occupy contaminated land. That is not the case.
Instead, the contaminated land regime sets out the circumstances in which the regulatory authorities can require clean-up of land by (or recover their own costs of doing so from) those who “cause” or “knowingly permit” contamination or occupy the contaminated land. Only if a regulatory clean-up requirement arises, does it then become an offence not to carry out the necessary remediation or otherwise cooperate.2
In the context of contaminated land liability in the UK, in principle, there is no technical legal reason why a director/officer of a company cannot personally be responsible for clean-up under contaminated land (or water pollution) legislation as a “Class A” (primarily liable) person in his or her own right.
This could occur if the relevant director/officer could be shown to have “caused” or “knowingly permitted” the contamination in question through his or her decision making or other actions/inactions. The smaller the company, the more likely this is in practice.
Theoretically, the existence of directors of a company that has ceased to exist (and cannot therefore be a target itself) but that caused historic contamination of a site, might serve as a defence to the current corporate owner/occupier being liable as a “Class B” person (even if the relevant director/officer of the predecessor company is also ultimately able to avoid liability on the grounds of financial hardship).
It should not be forgotten in this context that, subject to certain specific exceptions, the mere fact that contamination exists at or under a site in the UK will, generally, not automatically trigger regulatory action (or, obviously, third-party claims).
Broadly speaking, UK environmental laws do not impose clean-up obligations on a company (or, therefore, its directors) merely because a site is or becomes contaminated, unless the pollution is also actively causing harm (or clean-up is triggered in some other way such as on permit surrender).
Indeed, the best environmental option can be to leave contamination in situ if it is not causing or likely to cause a problem.
Our Environmental Law team has recent experience of representing individual directors facing prosecution by the Environment Agency. Such cases can be enormously stressful for the individual concerned (and their families).
Regulatory investigations and prosecutions can be long, drawn-out affairs, increasing the impact on the director/officer concerned. All too often, the limits of indemnity for defence costs in companies’ directors’ and officers’ (D&O) policy limits prove to be wholly inadequate, adding an extra degree of pressure and stress. These indemnity limits should always be checked. Ultimately, a conviction may result in loss of employment and even disqualification from acting as a director.
Directors and officers of companies whose activities have the potential to impact on the environment should be aware of the scope of their individual role, particularly in relation to known or suspected contamination problems, and continue to take environmental risks seriously.
Despite dwindling central government funding for contaminated land enforcement, the trend is towards more rather than less environmental law enforcement action against individual directors. However, in most cases, the application of common sense, careful due diligence in an M&A context and a watchful eye thereafter will avoid the pitfalls described above.
If you would like more information about any of the issues raised in this article, or brownfield land in general, please contact any of the authors or your regular relationship attorney.
1. Such provisions are, for example, to be found in key UK statutes such as the Environmental Protection Act 1990, the Water Resources Act 1991 and the Environmental Permitting Regulations 2010.
2. Offences may, however, also be committed as a result of the same pollution under other legislation such as that of protecting the aquatic environment, certain waste laws and/or certain environmental permits. There is also more recent legislation (implementing the EU Environmental Liability Directive) that imposes so-called self-executing duties on certain companies to carry out remedial action and notify the regulator of contamination problems without waiting for regulatory intervention. Not to do so is an offence, and this legislation (the Environmental Damage (Prevention and Remediation) Regulations 2009, as amended (the “EDR”)), also includes provision for parallel personal liability of company officers who are proved to have consented to or connived in the commission of the offence, or neglect or where it is attributable to their neglect. However, although the trigger conditions for such liability are complex, broadly speaking duties under the EDR only apply to more severe pollution incidents and only to new pollution caused after 1 March 2009.
Client Alert 2014-022