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Chelmsford Broker Warns Too Many Directors Believe Limited Company Status Protects Them

24 Feb Chelmsford Broker Warns Too Many Directors Believe Limited Company Status Protects Them

Directors and managers of Limited Companies are being warned that Limited status does not protect them from being personally liable for claims, which may be brought in response to the decisions they have made during the pandemic or before.

Ascend Broking, a specialist commercial insurance broker based in Chelmsford, warns that many directors wrongly believe they are shielded from personal liability, when they found a company.

It also stresses that the potential of claims being brought against company directors, trustees and managers is always at a peak following any form of crisis and that experts are anticipating a wave of litigation, once the full impacts of Covid-19 unfold. There had already been an increase in lawsuits against directors and officers prior to the pandemic and insurers, lawyers and business experts expect this to snowball.

The two main areas in which Covid-19-related claims against directors are most likely to emerge are insolvencies and employee relations. Traditionally, private Company lawsuits tend to involve employees, whether due to a contractual dispute, or a situation relating to an employer’s disregard for an employee’s health and safety.

Given the economic impacts of Covid-19, however, we are likely to see many more cases brought against directors who take their company into insolvency. Whilst Government measures have so far protected many companies from insolvency, the figures rose above 2019 levels in December 2020, for the first time in the year, causing warning bells to sound.

What is worrying is that only a handful of directors have taken up the opportunity to restructure their company with the assistance of an insolvency practitioner – a step the Government believed would facilitate many company rescues. Not having taken this option is just one area in which consequences of inaction could come back to haunt directors.

There are 1600 different regulations and rules that can catch out a director, trustee or managerial decision-maker, but many legal cases of the kind anticipated, will relate to the failure of a director to carry out duties required of them in Section 172 of the Companies Act of 2006. This sets out how a director must behave, to fulfil their statutory duty to promote the Company’s “success”.

Within this section, there is specific mention of directors having to pay regard to the likely long-term consequences of any decisions made. Other references relate to taking into account employees’ interests, business relationships with suppliers, customers and others, impacts of the Company on its community and environment, company reputation and the need to act fairly as between members of the company.

The Attorney General, at the time, defined “success” as being likely to mean “long term increase in value” or “achievement of a company’s objectives.”

In this light, Covid-19 throws up many dilemmas for directors who have not led their company with competency, with actions by shareholders, suppliers and employees all being a possibility. Legal actions have already started to emerge in the USA and, these days, trends travel fast across the Atlantic.

As well as general company failure, experts anticipate that we will see directors sued for their lack of preparedness for Covid-19, inflexibility in the supply chain, discrimination against some employees in furloughing and redundancy decision-making, Covid-19 working conditions and demands made of employees during Covid-19, health and safety breaches and even GDPR breaches. There has been a rise in cyber crime during the pandemic and an attack could prove a company’s data protection systems inadequate.

Ascend Broking’s managing director, Matthew Collins, says: “There are many ways in which a director, or manager in charge of a key area of the business that is found to be at fault, can be found personally liable for company failings, losses or injuries and yet so few company directors are aware of this and believe limited company status is all they need to protect their personal assets.

“Ascend has a new insurance option for directors and officers at our disposal and we believe it is something all directors need to consider. It will pay both legal defence costs and any penalties awarded by the courts, which could otherwise come from a director, manager or trustee’s own savings and assets. It also has many other benefits. We urge corporate decision-makers to act now, buy cover and not take the risk.”

As Robert Louis Stevenson said, “Sooner or later, everyone sits down to a banquet of consequences.” In many commentators’ views, the litigation feast will start the minute Government support for businesses ends.