UK: Missing A Penalty – Directors' Duties And Employers' Liability Insurance

Last Updated: 26 July 2016
Article by Marco Rinaldi
Most Read Contributor in UK, September 2017

What can an employee do when he is injured at work, but his employer goes into liquidation? If his employer had insurance, the answer is simple – he can make a claim, and the insurance policy will respond. But what if there was no insurance in place?

The Case

Campbell (Appellant) v Gordon (Respondent) (Scotland) [2016] UKSC 38

The Issue

Companies have long been under a duty to have appropriate employer's liability insurance in place, as set out in section 1(1) of the Employers' Liability (Compulsory Insurance) Act 1969.  Failure to do so can result in a criminal penalty for the directors of the company. 

The question the Supreme Court had to consider here was whether Parliament had also intended that such a failure should result in civil liability for the directors.

The Facts

On 28 June 2006, Mr Campbell was working with an electric circular saw when he suffered an injury.  While the company had employer's liability insurance, there was a specific exclusion for claims arising from the use of "woodworking machinery" powered by electricity.

That put the company in breach of section 1(1) of the 1969 Act.  The company itself went into liquidation in 2009.  Given the circumstances, Mr Campbell sought to bring a claim against Mr Gordon as director of the company, for his failure to provide adequate insurance cover.

Before the Inner House of the Court of Session, his claim was dismissed, which led to the appeal to the Supreme Court.

The key provision for consideration was section 5 of the 1969 Act which imposed a criminal penalty on directors for failure to have adequate cover in place.  There was no mention made of any civil liability for such a failure.

Mr Campbell accepted that simply because a statute imposed a criminal penalty for failure to comply, this did not automatically mean there would also be civil liability.  However, there were exceptions, and he relied on the words of Lord Diplock in Lonrho v Shell Petroleum Co Ltd (No 2) [1982] AC 1173: "where upon the true construction of the Act it is apparent that the obligation or prohibition was imposed for the benefit of a particular class of individuals."

Mr Campbell submitted that these words were directly applicable here.  The duty imposed by the 1969 Act was for the protection of employees such as him.  A functional, rather than formalistic, approach towards the statute was required – what was its purpose?  The answer here was that its purpose was to protect employees, and therefore the court should apply Lord Diplock's exception.

Mr Gordon argued  that a formalistic approach was necessary, and when applied, this meant that section 5 of the 1969 Act did not confer civil liability on a director.

The Decision

By a majority of 3 to 2, the court dismissed Mr Campbell's appeal.

Lord Carnwath  (with whom Lord Mance and Lord Reed agreed) set out that even taking Lord Diplock's exception on board, there was no suggestion that a person can be made indirectly liable for breach of an obligation imposed by a statute on someone else (i.e. the company).  The obligation here was on the company, not Mr Gordon as director.  It was not possible to pierce the corporate veil to impose liability on a director through the acts of the company unless it is specifically or impliedly justified by statute.

Instead, the court must pay due respect to the language and structure used by Parliament, rather than seeking to interpret what its objectives could or should have been.  Section 5 imposed a "specific and closely defined criminal penalty" on a director, but no civil liability.  The language was deliberately chosen, and thus a more general liability could not be inferred.

Lord Toulson, together with Lady Hale, disagreed.   They considered it wrong to take too formalistic an approach; a functional approach is needed, looking at the objective of the statute.  The answer to the question "What does it really do?" is that the provision is a concise means of extending statutory responsibility for seeing that the company is properly insured to the company's directors, backed by penal sanction.

It has long been held from as far back as the Victorian age that breaches of legislation for the protection of employees can allow a claim at common law.  If the statute is silent on civil liability, it is for the court to fill in the gaps, unless there is a clear statutory intention to the contrary.  There was no such intention here, and he would have allowed the appeal.

Lady Hale, agreeing with Lord Toulson, suggested that Parliament does not legislate in a vacuum, but does so in the knowledge of the current state of the law.  In 1969, statutory duties imposed on employers for the benefit of employees who suffer injury as a result of their breach gave rise to civil as well as criminal liability and "that is still the law today."

Our view

The outcome of the case is perhaps harsh on Mr Campbell.  He was left with no practical remedy.  Where there is such a "black hole" the courts will often seek to provide a remedy if the wording of the statute allows that to be done.  The majority in this case considered that the wording of the statute was such that it was difficult to imply such a duty in line with the normal approach to statutory interpretation.

Given the strongly worded dissenting opinions, it would not be a surprise to see the introduction of legislation to overturn this particular finding, and make directors civilly liable in damages for the failure to obtain adequate insurance as well as criminally liable..

Read the full decision here.

Missing A Penalty – Directors' Duties And Employers' Liability Insurance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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