July 25, 2011
A company is deemed to have a separate liability to its shareholders and directors. This is referred to as the “corporate veil” or the company being a “separate legal entity” and will largely prevent a director from being held liable in respect of a company’s obligations.
Directors are not wholly protected, however, and there is a vast amount of legislation that renders directors at risk from personal liability.
The Companies Act contains the principal framework governing directors’ duties. Under this Act, directors are under a duty to promote the success of the company and to exercise reasonable skill, diligence and care. Such duties are enforceable only by the company.
The Financial Services and Markets Act and Health and Safety at Work Act also impose statutory duties on directors. Perhaps more extensive legislation concerning directors is the Environmental Legislation and the Insolvency Act.
Under the Insolvency Act 1986, directors may be found personally liable if they “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”. Furthermore, they may be liable for any transactions entered into by an insolvent company to defraud its creditors. The insolvency and subsequent dissolution of a company is of particular relevance when consideration is given to the contaminated land regime.
The contaminated land regime sets out a strict method to apportion liability for contaminated land. In the first instance, liability will attach to Class A persons who knowingly permitted the land to become or remain contaminated. This is where directors can be found liable. If Class A persons cannot be identified, it will be Class B persons who are liable. Class B persons are the current owners or occupiers of the contaminated land in question.
In the context of some environmental legislation, the wording of the offence is wide enough to render directors personally liable. An example is the Water Resources Act; s85(1) makes it an offence to pollute controlled waters and a person who “causes or knowingly permits any poisonous, noxious or polluting matter or any solid waste matter to enter any controlled waters” will be liable. This wording has been interpreted widely by the courts and a director will be “knowingly permitting” if they have knowledge of an issue and the power and opportunity to act.
In addition to the above, there are also common law duties owed by directors. The current legal system, therefore, explicitly provides for potential liability of directors and is willing to lift the corporate veil where appropriate and vigilance and care is ever more necessary.
For further information, please contact Andrew Woods, Partner and Head of Commercial Property at Spratt Endicott Solicitors, on 01295 204000 or email him at awoods@se-law.co.uk.
