Directors Liability

Directors liability is a complex area of the law which is often overlooked by Directors who are often unaware of what their duties are.

Changes to The Companies Act which came into force in 2006 enforces various duties upon directors these include due care and diligence as well as a whole range of director responsibilities.

There have been many cases that have set out certain precedents in respect of Director Duties and, the law makes it clear that ignorance is no defence.

Directors who fail in their duties can be personally liable to the company, its shareholders, investors, creditors and the general public. In some cases they may even face criminal sanctions.

Care and Skill

By law a Director should carry out their duties with 'the care an ordinary man would take in the same circumstances on his own behalf' and with the skill one would expect from someone of his 'particular knowledge and experience'. Where duties are delegated to managerial staff, directors must be satisfied that the manager is sufficiently experienced, honest and reliable. A Director may face personal responsibility for his actions if he breaches these duties and, the company can sue for recovery of its property or damages.

Fiduciary Duties

A director must act honestly, in good faith and in what he reasonably considers to be in the best interests of the company, in all his dealings with or on behalf of the company. There should be no conflict of interest so, where a director's personal interests and those of the company conflict, the interest of the company must take precedence. A director is obliged to promote and protect the interests of the company. If a director breaches these duties he may face a civil action brought by the company, its shareholders or, in certain circumstances those doing business with the company.

Statutory Duties

Statutes impose an expanding range of duties upon directors. These have extended since the introduction of the Companies Act 2006. There are now more than 200 provisions for imposing fines and penalties upon directors. The following statutes also impose duties upon directors: Companies Act 1985; Insolvency Act 1986; Financial Services Act 1986; Environmental Protection Act 1990; Health and safety at Work etc. Act 1974. Breaches of statutory duties may lead to criminal prosecution, imprisonment and fines. A director may also find himself subject to disqualification proceedings.

Other Duties

A director who personally directs and procures the company to commit a tort is himself equally liable to the victim as the company. A director may be personally liable for substantial damages and cannot rely upon indemnities provided by the company. The directors' interests and those of the company are not always compatible, indemnities from companies where directors are in conflict, or where the company is insolvent, are invalid. The best protection for directors is to insure against their potential liabilities.

Non-Executive Directors

Following the collapse of Enron in 2002, the DTI gave Derek Higgs he task of reviewing the role and effectiveness of non-executive directors in the UK. The Higgs review was published on 20th January 2003, the review focuses on the effectiveness of non-executive directors in their positions of promoting the performance of the company and their associated accountability. Many recommendations were made in an attempt to increase transparency in the appointment process and widening the spread of experience. The outcome of all this resulted in a new level of responsibility being owed to a company by it's executive and non-executive directors. It has usually been the executive directors that have been in the firing line but since the increased status and pay of non-executive directors, it is likely that their role in failing to prevent corporate collapses will be more closely scrutinised by both claimants and regulators. Non-executive directors are now expected to be of a higher calibre due to the increased expertise and standards, at greater exposure to liability