Directors & Officers
With UK and EU legislation increasingly affecting most aspects of corporate management, it is all too easy for directors, quite innocently and with no dishonest intent or criminal motive, to breach their duties - with potentially disastrous consequences for both themselves and the company. Frequently, the mistake they make will not be uncovered for some time. Then, armed with the wisdom of hindsight, a zealous shareholder, group of institutional shareholders, liquidator or other interested person may use that mistake as a hook on which to hang a legal action against the individual director or officer.
No longer can directors rely for protection on the separate legal personality of their company -'piercing the corporate veil' has become an increasingly common occurrence. 'Limited liability' is protection only for the shareholders - not for the director, whose personal liability is real and unlimited. Legislation, as well as judicial opinion, confirms that not only are onerous responsibility and duties imposed by law on directors, but also that there is a significant risk of personal liability attaching to them.
All directors should now be reassessing the full extent of their duties in law and their exposure to personal liability. The number of occasions when actions could be called into question, and subsequently regarded as wrongful, is far greater than one might at first imagine. They include negligent advice or misstatement (particularly in the context of a merger or takeover, when, for example, a failure to understand economic trends results in a poor forecast of the company's performance), any act which goes beyond the limits of the company's constitution (such as excessive borrowing), unauthorised payments (however innocently made), failure to disclose the full extent of the director's interests, as well as the failure to comply with a myriad of stringent statutory requirements.
Exposure to personal liability may also arise from a director's unavoidable conflict of interests, the making of loans, imprudent investment, the negligent supervision of delegated responsibility - or just plain error of judgment, particularly in allowing the company to carry on trading at a time when, with hindsight, it should have ceased.
Clearly, all directors need to exercise due diligence in avoiding, as far as they can, such personal liability.
But they will never be able to eliminate risk of loss totally - their safety net should be the protection afforded by directors and officers liability insurance ('D&O').
- A director of two companies who allowed the businesses to become closely mingled, failing to set up formal financial and structural arrangements, was found in breach of his common law duty of care when one of the companies became insolvent.
- A director of a wine importing company was disqualified for 12 years and ordered to pay £1.3 million for wrongful trading in a precedent setting case which could allow liquidators and the DTI or Official Receiver's Office to save time and costs by jointly pursuing their claims where there is a common interest.
- Directors of a well-known hotel chain who relied on accounts which they knew to be inaccurate when authorising payment of dividends, were found personally liable to repay £26.7 million in respect of those dividends authorised, even though they had not benefited from the payment themselves.
- A director was disqualified for four years after a liquidation in which the company had prioritised its payment of debts, with the aim of trying to continue trade and ultimately to be able to payoff the other creditors.
- Two directors of a road haulage company were convicted of corporate manslaughter, both receiving suspended sentences, where a driver employed by the company fell asleep while driving one of the company's trucks, killing two motorists.
- The co-founder of a well-known visitor attraction who registered the company trademark in his own name was found to be in breach of his fiduciary duty as a director, since he knew before registering the mark that it was being used by the company and that the company was generating goodwill in the mark by and on behalf of the company.
- Fourteen directors of a privately-owned delivery business were banned after the company became insolvent last year. This is the largest number ever to be banned in one company. The company had a turnover of £3 million and losses of just under £1 million. The books and records were found not to be up to the necessary standards and there was a lack of adequate working capital.
- Three former directors of a well-known residential estate agency and provider of financial and property services were fined by the Securities and Futures Authority for their roles in the £1.2 billion aborted hostile take-over bid for a family of co-operative businesses, after they were found to have failed to act with due skill, care and diligence in their receipt of confidential information in the preparation of the hostile bid.
- A UK company and named directors face a class action suit in the US alleging breaches of the Securities Exchange Act 1934 following issuance of press releases. The suit alleges these contained "material misrepresentations to the market".
- The former chairman of an auction house faces a class action suit in the US alleging price fixing. The suit was filed after another auction house disclosed it had been granted conditional amnesty by the US Justice Dept with respect to the government's antitrust investigation into anticompetitive conduct involving the two auction houses.
- The managing director of a clothing manufacturer faced a £2.5 million libel action over comments he was alleged to have made when asked his opinion about some material being put on the market. Despite winning the case he was unable to recover £250,000 legal costs.