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Phew! We're incorporated, we're protected.
This is the second of a new monthly blog on legal and governance issues from Linda Barlow, in Co-operatives UK’s legal team and was inspired by the contributions made to the first post.
The blog is for people interested in starting, growing and advising co-operatives. They aim to share best practice on key issues, so we’d welcome comments and discussion on your relevant experiences. In order to help the thread of the discussion would ask that you keep your responses short and focussed on the issues being explored.
What is a director?
"'Director' includes any person occupying the position of director by whatever name called." Section 250 Companies Act 2006.
This is the legal test for directorship under the Companies Act 2006 and whether or not a particular individual is a director of a particular company is determined as a question of fact in a particular situation against this legal test of directorship. As such, terminology by itself does not decide the matter (ie just because you are not called a director does not prevent you from being a director and vice versa).
What matters is not what a director is called but the powers and duties s/he has collectively with the other directors under an organisation’s governing document and under the relevant law, which may be charity, company, industrial and provident society, trust and/or the general law.
As a director is tasked with these powers and duties it is it important that any person taking up the role of a director is aware of any potential personal liabilities s/he may be subject to whilst carrying out this role and in some cases when s/he has ceased carrying out this role.
In the previous blog post, a question was posed as to whether there any other situations where directors would have to assume the debts of the organisation and in which specific context?
In responding to the question is possibly more useful to explain how and when directors may be personally liable to third parties and in some cases their own company, so that any person appointed or indeed who is acting as a director of an organisation are aware of their position.
One of the common misconceptions is that incorporation protects directors from all liability. This is not the case, directors may assume personal liability:
(a) by way of fines or penalties for their own, or in some cases, the company, criminal acts or breach of statutory duty – (eg) duties to employees, health and safety, corporate manslaughter, bribery;
(b) where they direct or authorise a tort (legal word for a civil wrong) (eg) breach of duty of care to employees through acts of negligence;
(c) to the company for their own breach of trust of fiduciary duty (duty to act in good faith) or breach which they knowingly allowed to happen;
(d) if they enter into ultra vires (means outside the powers of the company) or unauthorised contracts (eg) causing a loss to the company through mismanagement;
(e) for the company’s debts while serving as a director whilst disqualified;
(f) for the company’s debts if it operates while insolvent or while becoming insolvent.
Directors’ liability insurance can cover some of these but not all – such as penalties for breach of statutory duties, liability arising from acts which the person knew was fraudulent or dishonest and he cost of unsuccessfully defending a criminal prosecution for dishonesty, liability arising from fraudulent trading.
Over to you.....
What are other people’s experiences of being a director of an organisation? Are there any procedures an organisation can put in place to ensure that directors are not subject to personal liability?
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This forum for discussion is intended to provide users with the opportunity to share practical experience and does not constitute legal advice. Should you require some assistance with particular legal and governance issues then you seek independent legal advice or alternatively members of Co-operatives UK can contact us for further advice.