Trustee Exchange 2012
22 Feb 2012
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Trading companies: hidden liabilities?
James Maloney responds to a vulnerable chief executive who has recently been made a director of the charity's new trading company.
Dear editor,
The charity of which I am chief executive has recently set up a potentially risky, wholly-owned trading company. I am required in my role as chief executive to be a director of the trading company, the other directors being a trustee and two people not connected with the management or administration of the charity. I am concerned about the personal liabilities that I and the trustee may have inadvertently taken on.
Can I assume that my charity will automatically indemnify me for all actions I take as a director of the trading subsidiary? Will trustee liability insurance cover the trustee in all his dealings as director of the trading subsidiary? Is there any protection that can be offered to unpaid directors of trading subsidiaries of charities?
Yours sincerely,
A chief executive who suddenly feels vulnerable
Dear chief executive,
You are right to consider the responsibilities and potential liabilities you are taking on by becoming a director of the trading company. However the good news is that, provided you are careful, the limited liability status of the trading company should make it unlikely that you will suffer any personal liability as a result of agreeing to be a director.
Whilst the trading company is solvent (because it can meet its debts as they fall due or because it has more assets than liabilities) you and the other directors will owe duties to the company. In the event that the company becomes insolvent, your duty will be to the company’s creditors. If the company experiences financial difficulties it is very important that you proceed with care because under insolvency law directors can be personally liable if they allow the company to trade when insolvent.
The duties of a company director under company law are now set out in the Companies Act 2006 in the form of seven statutory duties (although three of these are not yet in force). One of these duties is a duty to avoid conflicts of interest and you and the trustee directors need to be sure to take advice on the point because of the potential for conflicts between your roles within the charity and the company.
You will almost certainly have other statutory duties (such as under health and safety law) and failing to comply with these duties can sometimes be a criminal offence so again you need to take care and good advice.
The request to be indemnified by the charity for any liabilities they incur as a director of the trading company is one commonly made by employee and trustee directors. Giving an indemnity of this kind can be difficult for the charity, so many charities deal with that problem by suggesting to the directors that the company itself takes out directors’ and officers’ (better known as 'D&O') liability insurance. These policies vary but as long as you do not commit fraud or act in bad faith, they can provide cover for claims arising out of negligence, default or breach of duty in relation to the company.
Yours sincerely,
James Maloney is a solicitor at Farrer & Co
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