About Directors and Officers Liability

Why Directors & Officers Liability

Directors' duties are set out in an amalgam of case law and relevant sections from various statutes and regulations. Directors are often unaware of what their duties are. Ignorance is no defence. Directors who transgress can find themselves 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

Common law duty requires Directors to 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'. If duties are delegated to managerial staff, directors must be completely satisfied that the manager is suitably experienced, honest and reliable or they may face personal responsibility for his actions. If a director breaches these duties, 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 considers to be the best interests of the company, in all his dealings with or on behalf of the company. Where a director's personal interests and those of the company conflict, those of the company must take precedence. A director has an obligation to promote or protect the interests of the company. If a director breaches these duties he may face civil actions 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. In the Companies Acts alone there are more than 200 provisions for imposing fines and penalties upon directors. Amongst others the following statutes 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 with sanctions including imprisonment and fines. A director may also find himself subject to disqualification proceedings.

Other Duties

There are a number of further pitfalls, for example, a director who personally directs and procures the company to commit a tort is himself liable to the victim no less than the company. A director may be liable for substantial damages to be paid from his personal wealth. Directors cannot rely upon indemnities provided by the company. Generally speaking, such indemnities are void in so far as they are incompatible with s.310 Companies Act 1985. In any event the directors' interests and those of the company are not always compatible. Indemnities from companies with which directors are in conflict, or where the company is insolvent, are not worth the paper they are written on. The best protection for directors is to insure against their potential liabilities.

Non-Executive Directors

Following the collapse of Enron in 2002, the DTI commissioned Derek Higgs to undertake a review into the role and effectiveness of non-executive directors in the UK. The Higgs review was published on 20th January 2003 and focuses directly on the effectiveness of non-executive directors in their position of promoting the performance of the company and accountability. A number of recommendations were made with the aim of increasing transparency in the appointment process and widening the spread of experience. The outcome of all this will be a new level of responsibility owed to a company by it's executive and non-executive directors In the past, it has usually been the executive directors that have been in the firing line. In view of 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 will be expected to be of a higher calibre in the future and paradoxically, due to the increased expertise and standards, at greater exposure to liability