Do startups need to protect their company directors?

When setting up a business, you can forgive company directors when they don’t place corporate governance high up on the agenda. However, when dealing with the legal landscape and concepts such as personal liability they should take note.

If you’ve never managed a startup before, the different roles company director’s required to perform can seem overwhelming. However, as a person that makes decisions on behalf of the business, you should be fully aware of your personal liability and the protection available under directors and officers insurance.

As a company director you have the power to make your business act in a particular way. Therefore, you can be held accountable by the courts for ensuring your startup complies with all the applicable laws and regulations.

It’s a common misconception when setting up a business, the company directors are protected by the ‘corporate veil’ by creating a separate legal entity. Whereby, the obligations and duties of a company are solely the companies.

While it holds true the business may have limited liability, the courts have the power to make awards against the company director’s personal assets. Below we have identified some of the UK legislation and regulation, whereby company directors can be held personally libel:

Companies Act 2006

The Companies Act 2006 is the primary source of UK company law and sets out directors duties and responsibilities. Breach one of the seven codified duties could mean that company directors are held personally liable for their actions. Shareholders for example, could bring a claim for failing to act in the interests of the business.

Employment Law

Company directors can be found personally liable for a variety of employment related issues, including harassment, discrimination and unfair dismissal. Employees of startups are just as aware of their rights and will claim against an employer if they feel they have been unfairly treated.

Health and Safety Law

The Health and Safety at Work Act 1974 sets out the general principles of compliance, which is enforced by the Health and Safety Executive. Company directors have a duty to take reasonable measures to ensure the health, safety and welfare of all employees and others.

Criminal Finances Act 2017

Company directors can find themselves personally liable for their employee’s criminal activities, including activities such as tax evasion. Also, the Bribery Act 2010 makes it an offence to fail to prevent an associated person paying a bribe.

Insolvency Act 1986

Insolvency is one of the largest drivers to third party claims made against company directors. Under the Insolvency Act, company directors have a responsibility to protect the interests of creditors once there is a risk of insolvency. Company directors are duty bound to act in the creditor’s best interests.

Defamation Act 2013

The Defamation Act has made it harder to bring a successful claim in a UK court. However, if the business is found to have said or written anything that causes serious harm to an individual or corporate body, then company directors can be found personally liable.

General Data Protection Regulation

Data controllers are the primary party responsible for compliance under General Data Protection Regulation. However, processors can also be held personally liable towards data subjects in the event of non-compliance. Company directors have a duty to take reasonable measures to adequately protect data.

Environmental Damage

If there is a failure to protect the environment including wildlife and wild plants, company directors can find themselves personally liable under the Environment Act 1995 and the Wildlife and Countryside Act 1980.

How to manage the personal liability of company directors?

Your startup should hold board meetings at least every quarter and ensure these are clearly minuted to evidence any steps that have taken and why.

If a company director does not agree with their fellow board members on any particular matter, or suspects any wrongdoing, the concerned director should ensure their concerns are recorded.

It is important to remember, that as a company director you can be found liable for ‘neglect’. Which means there is no requirement for knowledge on your behalf, merely the failure to take appropriate action is sufficient.

The law will generally protect individuals from personal liability where they have acted in good faith and complied with their duties. However, given that your personal assets are exposed acting in the capacity of a company director, purchasing adequate business insurance should be seriously considered.

From startups to medium sized UK companies, directors and officers insurance is typically offered under a management liability policy. Offering cover for a legal defense and the cost of damages from allegations made while operating in the capacity of a company director.

Civil, criminal and regulatory allegations made against company directors can cause significant distress, as well as being very expensive and time consuming. Directors and officers insurance can offer comfort that you can mount a credible defense if everything comes tumbling down.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.