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Limited Liability Risk

Limited Liability Risk

We had a great reaction to last week’s thought-provoking risk perceptions! Now that we’ve shattered the perception of risk let’s see if we can tease out another example.

In business the existence of a limited liability company is a significant comfort to its founding shareholders. Broadly speaking, if the company fails the extent of the shareholders’ liabilities cannot extend beyond their individual inputs.

Surely that’s straightforward; surely that provides certainty. Alas not! It’s another illusion.

In a very narrow interpretation, the statement is indeed correct. If the company fails (in an orderly fashion) and there are no accusations of negligence or malfeasance; and if the creditors line up in a regimented row and accept their medicine; and if there are no legal actions pending; and if……………. the permutations are too numerous to list but it does give a lie to the simplistic comfort of limited liability.

But what if the company does not fail? What if it is a successful going-concern? Do the founding shareholders, directors and senior management enjoy limited liability? Absolutely not!

In our litigious world the illusion of certainty around limited liability is extremely unfortunate and may leave erstwhile innocent parties exposed to detrimental consequences.

A company director can be held personally responsible for all of the company’s actions and strategies. Disgruntled shareholders, employees, customers, environmentalists and any host of fringe groups (domestic and foreign) may take a law suit against the company AND also against the directors of the company. In larger organisations, senior managers, responsible for significant decision-making, may also be mentioned as parties to such claims. Legal departments are constantly on alert.

However, the position is much more worrying for smaller firms that simply cannot bear high legal costs resulting from accusations of negligence against the directors for a lack of due care and attention in the performance of their duties. Directors and officers are accountable for their own actions AND, more alarmingly, for those of their fellow directors. In such circumstances, directors and officers have unlimited personal liability.

All too frequently we have seen instances of a trusted, loyal employee taking legal action against the company and its individual directors over a perceived grievance. Similarly the chances of fellow directors becoming embroiled in a legal wrangle with each other are also on the increase.

Even if one party is totally innocent (aren’t they all? – Ed) the defence of an allegation can incur significant costs and expenses. In many circumstances this financial burden must be borne by individual directors (innocent or not).

With the ever-increasing demands of more complex legislation (employment practices as an example) it is nigh-on impossible for any director to be confident that he/she is on a sure footing. Limited liability how are ye!

As with all financial risks there are ways to mitigate these difficulties. Don’t become a company director!! – or, if you must, make sure you have adequate insurance. If you have concerns about the liabilities of directors and officers in your company MMPI can help.

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