Director Not Liable for Company Insurance Shortfall

When a company received a claim for compensation from an employee who suffered an injury whilst using a circular saw, it became clear that the employer’s liability insurance policy did not cover the risk of the injury: it specifically excluded claims arising from the use of ‘woodworking machinery’.

The company went into liquidation and the injured employee, in an attempt to obtain compensation, took legal action against the sole director of the company.

The claim was based on the argument that the company was required by statute to have adequate insurance cover, which it did not. The relevant law provides that an employer may be prosecuted or fined for failing to have in place the appropriate insurance cover and that the criminal penalty can also be applied to ‘any director, manager, secretary or other officer of the corporation’.

The case went to the Supreme Court, which rejected the argument (by a 3-2 majority), Lord Carnwath commenting that ‘there is no suggestion…that a person can be made indirectly liable for breach of an obligation imposed by statute on someone else’.

The case clarifies the position of a director in such circumstances. Whilst he or she can be held criminally responsible in appropriate circumstances, the ‘veil of incorporation’ will not be pierced to permit the injured party to take civil action directly against the director(s) under whose management the company breached its legal obligations.

The veil of incorporation exists to protect shareholders and (in some, but not all circumstances) directors of companies from the results of corporate actions, a company in English law being a separate legal person from its shareholders and directors.

For advice on any aspect of company law, contact John Keeble.