This appeal concerns the liability of a company director for the company’s failure to put in place appropriate employers’ liability insurance.mcgregor_douglas_0

There has been some discussion regarding the merits of the decision of the English Court of Appeal in the case of Richardson v Pitt-Stanley [1995] QB 123 over the last 20 years (see, for example, paragraphs 5.15 & 13.12 of Munkman on Employer’s Liability, 16th Edition). The Supreme Court has now been asked to clarify the extent of the obligations on companies and their directors in relation to employers’ liability insurance.

The Background

The pursuer, Mr Campbell, was employed as an apprentice joiner by Peter Gordon Joiners Ltd. In June 2006 he was injured by a circular saw while at work but the employers’ liability insurance policy taken out by his employer did not provide cover for the use of electrically powered woodworking machinery.

Mr Campbell’s employer went into voluntary liquidation in 2009 and had no funds to meet the pursuer’s claim. The pursuer therefore also sued Peter Gordon, the sole director of the company, for breach of statutory duty to effect insurance.

Mr Gordon, the defender in this case, disputes the circumstances of the accident, alleging that it was the pursuer’s fault, and disputes whether he was responsible for the admitted lack of insurance cover. Leaving aside this factual dispute, he also argues that civil liability does not attach to a director even where there has been a breach of the Employers’ Liability (Compulsory Insurance) Act 1969. It is this line of defence is now in the Supreme Court.

The relevant statutory provisions

SThe Employers’ Liability (Compulsory Insurance) Act 1969, ss 1 and 5 provide:

1. Insurance against liability for employees

(1)        Except as otherwise provided by this Act, every employer carrying on any business in Great Britain shall insure, and maintain insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business, but except in so far as regulations otherwise provide not including injury or disease suffered or contracted outside Great Britain. …

5. Penalty for failure to insure.

An employer who on any day is not insured in accordance with this Act when required to be so shall be guilty of an offence and shall be liable on summary conviction to a fine not exceeding level 4 on the standard scale;  and where an offence under this section committed by a corporation has been committed with the consent or connivance of, or facilitated by any neglect on the part of, any director, manager, secretary or other officer of the corporation, he, as well as the corporation shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Proceedings in the Outer House

In the Outer House, the court held that a director can be civilly liable for breach of the qualified statutory duty imposed by the Act. Lord Glennie accepted that the general rule is that where an act enforces performance of an obligation in a specified manner, then performance cannot be enforced in any other manner. However, he found that the pursuer’s claim fell within one of the recognised exceptions to that general rule: where the obligation imposed by the statute was imposed for the benefit of a particular class of individuals, then the statute may be taken to have created “a correlative right in those persons who may be injured by its contravention” (per Lord Kinnear, Black v Fife Coal Co. Ltd [1912] AC 149 at 165).

Lord Glennie’s view was that the Act was clearly for the benefit of employees. Its purpose, in combination with the Third Party (Rights Against Insurers) Act 1930, was to prevent them being left without a remedy if the employer becomes insolvent.

In contrast, the Court of Appeal in Richardson held that the Act was imposed both for the benefit of employers and employees and that breach of the Act did not give rise to any civil liability on the part of the company or an individual director/officer.

The appeal in the Inner House

All the judges in the Inner House accepted that the Act was for the benefit of the employees of the company. However, the majority (Lords Brodie and Malcolm) found that the duty in s 1(1) is imposed only on the company. As a result, if the Act created a civil right to claim then the right would be against the company only. That would be a “palpably redundant, worthless and perhaps illusory sort of right” against an insolvent and uninsured employer. Such a right would be “useless” and Parliament cannot have intended to create it. If there is no right against the company then there can be no right against a director, because it would be anomalous if there was a right to sue a director but not the company.

A key decision relied upon by the pursuer, Monk v Warbey [1935] 1 KB 75, was distinguished as being concerned with a different statute imposing an “absolute and unqualified duty” on the owner of a car not to permit it to be driven without a policy of insurance in force. Moreover, Lord Brodie considered the decision in Monk was inconsistent with more recent authority on the existence of a private law right of action.

Lord Drummond Young, dissenting, disagreed with the reasoning of the Court of Appeal in Richardson. In his view, the purpose of the Act would be frustrated if civil liability were not imposed on directors who were guilty of an offence under s 5. A director complicit in breach of the Act should be liable as well as the company since a company can only act through its officers. A director who has authorised, directed or procured the commission of a delict by his company may be found personally liable to the victim of the delict. If failure to maintain insurance is a wrongful act giving rise to civil liability then facilitation through neglect should also be sufficient to render the director civilly liable.

Lord Drummond Young did not consider it to be unfair that a director might become personally liable as a result of having ignored or deliberately disregarded the company’s statutory duties. He pointed out that if the director has received professional advice from an insurance broker (as it appears Mr Gordon did) then there may be a right of recourse against the broker if insurance turns out to be inadequate. The Act makes it clear that in order to be found liable, a director must be implicated in the failure to obtain insurance and Lord Drummond Young was not persuaded that placing a burden on directors responsible for the overall management of the company was problematic.

Lord Drummond Young considered that despite differences in the legislation involved, there were “underlying substantive similarities” with Monk v Warbey which supported the view he took of the Act.

The Supreme Court

Most of the submissions before the Supreme Court rehearsed those made by the parties in the Court of Session. The respondent did raise one new argument: the prospect of floodgates being opened. It was suggested to the court that the key wording used in s 5 in relation to the liability of directors and other office holders (“consent or connivance of, or facilitated by any neglect”) is used in numerous statutes within the UK creating criminal offences. It was argued that the addition of civil liability on the part of individuals would result in widespread lifting of the corporate veil. The appellant argued in response that this was a “virtually unique” case and the extent of potential difficulties suggested by the respondent would be restricted since claims under the Act involved a closely defined class of beneficiaries.

The appeal was heard by Lady Hale, Lord Mance, Lord Reed, Lord Carnwath and Lord Toulson on 12 April 2016. Judgment is awaited.