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Supreme Court rejects claim against company director who failed to take out appropriate insurance

By Declan Finn and Graham Ludlam (DAC Beachcroft). 
4 October 2016 

Campbell v Peter Gordon Joiners Ltd (in liquidation) and another (2016) UKSC 38 considered whether an employee could successfully bring a civil action against a director of a company in liquidation for having failed to obtain appropriate employers' liability insurance.

Facts

C was an apprentice joiner employed by a company who suffered an injury at work whilst working with an electric saw. The company held employers’ liability insurance but it did not respond to C's claim as the policy excluded claims arising from the use of “woodworking machinery” powered by electricity.

The company had failed to secure appropriate insurance and was in breach of its obligations under the Employers’ Liability (Compulsory Insurance) Act 1969. Section 5 of this Act provides that if the offence was committed as a consequence of a director's failure, the director shall be deemed to be guilty of that offence. Importantly, the Act does not impose any duty to insure on a director or other officer as such, let alone any civil liability for the failure to do so.

Claim against the director

Following the company's liquation in 2009, C pursued a claim against its sole director, G, for failing to secure appropriate insurance. The question for the Supreme Court was whether civil liability attached to the director, G, for the company's failure to secure adequate insurance.

C argued that the court should impose civil liability upon G as the duty to insure imposed by the Act (taken in its context) existed to protect employees such as C. In doing so, C drew an analogy with Monk v Warbey [1935], in which the Court of Appeal held that a car owner, who had allowed an uninsured driver to use the car, was liable in damages to a third party for breach of his statutory duty to insure.

Judgment

By a majority of three to two, the Supreme Court dismissed C’s appeal holding that: 

• The duty imposed by the Act was for the protection of employees; however the nature of the penalty imposed in section 5 of the 1969 Act did not impose liability on directors.
• The piercing of the corporate veil and imposition of liability on a director is only permissible if such circumstances are expressly or impliedly justified by statute. The language of section 5 was purposely selected and directed solely at criminal liability and the Court could not infer civil liability.

Lord Toulson and Lady Hale dissented. Lord Toulson considered that the function and effect of the Act was to protect employees and where statute is silent on the matter of civil liability, the role of the court is to fill in the gaps of the legislature. Where legislation is passed for the protection of employees, his view was that a breach should generally lead to a cause of action for the employee. Lady Hale concluded that it was "absolutely plain" that Parliament had intended there to be civil liability.

Commentary

The case confirms that directors will not be personally liable for damages under the Act even if it is their fault that the company has failed to obtain adequate insurance for employees. However, directors may face criminal prosecution if they are responsible for their company’s failure to insure properly.

From a D&O insurance perspective, the case provides welcome clarity on a directors' liability under the Act. Insurers should beware reading too much into the director's escape from liability in this case given it was restricted to the Supreme Court's analysis of the specific wording of the Act. It will be interesting to see whether the judgment prompts legislative change given Lord Hale's conclusion that the wording of the Act did not reflect Parliament's intention.