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Board members’ responsibilities for business compliance
The term Board is used to cover a wide range of governing bodies, including Directors, Trustees, management committee and executive committee. The Board is responsible for governing and leading the social business as identified in its legal rules.
Your Board should have the necessary skills, knowledge and experience to manage and lead the social business to ensure it delivers its mission and discharges all legal and regulatory requirements. This will involve ensuring that:
- Board members are legally appointed
- All Board members are aware of their individual and collective responsibilities
- All relevant business compliance requirements are met
- Legal, systematic and proper oversight of delegation to officers, sub-committees or paid staff and volunteers.
What might happen if board members do not take full responsibility for all relevant business compliance? First you need to understand liability.
Personal liability: An unincorporated business does not have its own identity and as such its owners are personally liable for its debts and for any lawful action brought against the business. Liability is unlimited.
Limited liability: A limited liability business has its own legal identity, distinct from its Board members and members, meaning that only the business is liable to pay its debts or for any lawful actions; the Directors and members are protected from liability. There are special and rare circumstances when individual Board members may find themselves personally liable.
The purpose of this guide is to make you aware of your legal duties as Board members and to support you to ensure your business is legally compliant in every sense of the word. Fulfilling your legal roles and responsibilities as Board members of a limited liability business should ensure that you minimise any risk of being personally liable for any debts or legal action brought against you.
There are various areas where liability might arise in running a business as follows:
As mentioned above, a Board member enjoys the advantage of limited liability and is not personally responsible for a social business’s debts. This means that if a business can’t pay its debts, only the assets of the business can be taken in an attempt to settle the debts.
There are some instances where Board Members/Company Directors may be held personally liable for a business’s debts and will use their own funds and assets to settle these:
- A Board member has signed a personal guarantee when taking on a business loan
- The social business has an overdrawn Director’s loan account
- Board members have traded fraudulently i.e., with the intent to defraud
- Board members have traded wrongfully i.e., continuing to trade when debts can’t be paid and the Board members/Directors knew, or should have known, there was no reasonable prospect the business would avoid insolvency, liquidation or administration.
This can be avoided by ensuring you comply with all the necessary requirements with regards to your regulator (e.g., Companies House) and HMRC and by ensuring you monitor the social business’s financial position, acting always in good faith.
When employing staff, Board members can, like other employees, be held liable for certain employee claims. Claims can be dealt with through an employment tribunal on unfair and wrongful dismissals, discrimination, equal pay, and deductions from wages. The outcome is likely to be a settlement agreement including compensation for the employee. Claims can be brought, for example, against the individual who have discriminated, as well as against the social business.
Under health and safety law, as an employer, you have a responsibility to protect workers and others from risk to their health and safety.
Board members must protect employees and others from getting hurt or ill through working. If you don’t, a regulator such as the Health and Safety Executive (HSE) or a local authority may take action against you under criminal law. The person affected may make a claim for compensation against you under civil law.
At worst, negligence can lead to a death in the workplace and an action of corporate manslaughter brought against the social business, if it is felt that there has been a gross breach of a duty of care. Prosecutors will charge individual Board members particularly if the social business is being prosecuted for corporate manslaughter.
Board members who act in breach of their legal duties and who do not take the issue of compliance seriously may face:
- Losing their limited liability
- Disqualification from acting as a Board member/Director
- Civil or criminal proceedings.