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A Scottish employers’ liability case holding that a director of a company was not liable to the company’s employee where the company failed to have adequate insurance in place even though it was required to have it by law.

LORD CARNWATH JSC said,

‘1. The appellant, [Mr C], was employed by the first respondent (“the company”) as an apprentice joiner. The second respondent, [Mr G], was the sole director of the company and responsible for its day to day operation. On 28 June 2006 [Mr C] suffered an injury whilst working with an electric circular saw. Although the company had employers’ liability insurance policy, the policy… excluded claims arising from the use of “woodworking machinery” powered by electricity. It therefore excluded any claim arising out of Mr Campbell’s accident. The company’s failure to have in place appropriate insurance was a breach of its obligations under section 1(1) of the Employers’ Liability (Compulsory Insurance) Act 1969 .

2 .The company itself went into liquidation in 2009. [Mr C] now seeks to hold [Mr G], as director, liable in damages for the company’s failure to provide adequate insurance cover… the sole issue for us is whether civil liability attaches to [Mr G] for that failure.

4. The foundation of the claim has to be found in the 1969 Act. The primary duty to insure is placed on the employer by section 1(1) , which provides:
“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 …”

5. Section 5 which is at the heart of the appeal provides, as amended by section 46 of the Criminal Justice Act 1982 and section 289G of the Criminal Procedure (Scotland) Act 1975 :
“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.”

(Emphasis added.)

6. On its face that is an unpromising basis for [Mr C]’s present claim. This provision does not in terms impose any duty to insure on a director or other officer as such, let alone any civil liability for failure to do so. The duty rests on the corporate employer. The veil of incorporation is pierced for a limited purpose. It arises only where an offence is committed by the company, and then in defined circumstances imposes equivalent criminal liability on the director or other officer on the basis, not that he is directly responsible, but that he is “deemed to be guilty” of the offence committed by the company.

7. [T]he appellant…relies on well established principles governing civil liability in respect of statutory obligations. He accepts that as a general rule, where a statute imposes an obligation and imposes a criminal penalty for failure to comply, there is no civil liability; but that is subject to exceptions, including
“where upon the true construction of the Act it is apparent that the obligation or prohibition was imposed for the benefit or protection of a particular class of individuals, as in the case of the Factories Acts and similar legislation”:
per Lord Diplock in Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] AC 173 , 185.

10. [Mr C] submits that Lord Diplock’s words are directly applicable to this case. The duty in question was imposed for the protection of employees such as [Mr C], and the context is identical to that of the Factories Acts…

11. In the court below, and in argument before this court, there was some discussion whether Lord Diplock’s statement of the exception represented the modern law…

12. For my part I find it unnecessary in this appeal to engage in discussion of the extent to which Lord Diplock’s formulation has been modified by later authorities… I am content to assume (without deciding) that Lord Diplock’s words remain a reliable guide at least in relation to statutory duties imposed for the benefit of employees. I would also proceed on the basis (agreeing in this respect with Sir John Megaw in Richardson’s case [1995] QB 123, 135C–D ) that the duty of the employer under section 1 of the 1969 Act was imposed for the benefit of the employees, in the sense indicated by Lord Diplock.

13. This however is not enough for [Mr C]. The essential starting point for Lord Diplock’s formulation is an obligation created by statute, binding in law on the person sought to be made liable. There is no suggestion in that or any other authority that a person can be made indirectly liable for breach of an obligation imposed by statute on someone else. It is no different where the obligation is imposed on a company. 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.

14. …The 1969 Act imposes direct responsibility only on the employer. The equivalent issue would be whether that is to be treated as giving rise to civil liability on the employer for failure to insure, notwithstanding the criminal liability imposed on him by section 5. That issue… does not arise in this appeal. However, there is no analogy with the position of a director or officer. Parliament has recognised that a director or officer may bear some responsibility for the failure to insure, but has dealt with it, not by imposing direct responsibility equivalent to that of the company, but by a specific and closely defined criminal penalty, itself linked to the criminal liability of the company.

18. …the issue before us, …depends not on general questions of fairness, but on the interpretation of a particular statutory scheme in its context. The fact that the company can only act through its officers tells one nothing about their potential liability to third parties for its acts or failures.
The judgment of Atkin LJ …affirms the rule (supported by reference to a statement of Lord Buckmaster in Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 AC 465 , 476) that directors are not in general liable for the tortious actions of the company. The scope of a potential common law claim against a director for ordering or procuring such a tortious act is not in issue in this case, which turns entirely on alleged liability under the statute. This requires the court to pay due respect to the language and structure used by Parliament, rather than to preconceptions of what its objectives could or should have been.

19. My view of the provisions is reinforced by a factor which was not addressed in the courts below or the written cases, but was drawn to our attention… This concerned the statutory background of the wording of section 5 . It seems that provisions in similar form, imposing criminal liability on directors and other officers for offences by their companies, have a long history….

23. I would be reluctant to attach too much weight to a point which has emerged so late in the day. Without more substantial research it is impossible to know to what extent this formula has been used in comparable contexts involving protection of employees. However, to my mind it tends to confirm the view that the language of section 5 was deliberately chosen and is intended to mean what it says. The formula is specifically directed at criminal liability, and as far as we know has always been used in that context. Where Parliament has used such a well established formula, it is particularly difficult to infer an intention to impose by implication a more general liability of which there is no hint in its actual language.

24. For all these reasons, I would agree with the conclusion reached by the majority of the Inner House and dismiss the appeal.’

Edited and reformatted for ease of reading.

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