The corporate veil sits at the heart of company law, an almost mystical line that forms the division between the directors of a business as individuals and the commercial entity they have come together to create.
The corporate veil is what limits a director’s liability, determining where the director’s responsibilities end and where the company itself has to carry the can for wrongdoing.
Over the years, the UK Parliament has allowed the corporate veil to be pierced, making it possible for directors to be found guilty of criminal offences relating to their company’s conduct, such as in the law surrounding health and safety.
However, a new Supreme Court ruling has shown the veil has not been lifted far enough for directors to also be liable for damages in civil cases when it comes to employer’s liability insurance.
The Supreme Court had been asked to rule on a case stretching back more than a decade. On 28 June, 2006, William Campbell, an apprentice joiner at Peter Gordon Joiners in Dumbarton, injured his left hand on an electric circular saw. Campbell claimed the saw was unguarded and that he had not been trained to use the piece of equipment. He could not make a claim for compensation through his employer’s insurance because the policy did not cover electric woodworking equipment.
Neither could Campbell sue Peter Gordon Joiners because the company was liquidated in 2009. Instead, he sued Peter Gordon, the company’s sole director, personally.
Under the 1969 Employers’ Liability (Compulsory Insurance) Act, it is a criminal offence for an employer not to have sufficient workplace liability insurance. A director of a limited company may also be committing a criminal offence if they consent to or connive in failing to have adequate employer’s liability insurance or if they have been neglectful.
The question that faced the judges in this case was whether a director would also be personally liable to pay compensation in a civil court case?
When the case initially came before the Court of Session in 2013, the judge – Lord Glennie – agreed Campbell should be able to sue Gordon for compensation. But Gordon appealed against the judgment to the Inner House of the Court of Session (in its capacity as the Scottish Appeal Court), which in 2015 sided with him.
The Inner House had accepted Gordon’s appeal by 2:1 with Lord Brodie and Lord Malcolm finding in his favour, and Lord Drummond Young dissenting. Their decision set the scene for this year’s showdown at the Supreme Court in London.
The Supreme Court’s decision was very close; the judges agreed with the Scottish Appeal Court’s decision and rejected the appeal by 3:2. Lord Carnwath gave the majority judgment, which was supported by Lord Mance and Lord Reed, while Lord Toulson and Lady Hale, the deputy president, expressed dissenting views.
Lord Carnwath ruled the 1969 Act was very clear in setting out criminal but not civil liability, while Lord Toulson felt “if the legislation is silent on whether there should be civil liability, the judges’ role is to fill the gaps”.
Lady Hale went further, suggesting it was “absolutely clear” Parliament intended for directors to face both criminal and civil liability in such cases.
As Lord Carnwath put it in his judgment: “There is no basis in the case law for looking through the corporate veil to the directors or other individuals through whom the company acts. That can only be done if expressly or impliedly justified by the statute.”
Many directors will have breathed a sigh of relief when they heard the judgment. The Supreme Court has ruled that directors should not be personally liable to pay compensation if their company has inadequate insurance.
But that does not mean that directors are off the hook. They still need to remain vigilant to make sure that their companies have adequate insurance in place – after all, they could still face criminal proceedings under the 1969 Act.
• Karen Dance is a partner at BLM