DIRECTOR LIABILITY FOR MISCONDUCT THEY DIDN’T CREATE
What directors should know:
Whether in the usual course of business or under the spotlight of corporate insolvency the conduct of directors has never been more scrutinised.
What is commonly known as the corporate veil [Saloman V A. Saloman & Co Ltd 1897] can be lifted exposing directors to personal liability. The corporate veil means that a company is an independent entity. It can make contracts in it’s own name and sue and be sued. As a company.
But, the Courts are increasingly willing to look at director personal liability in appropriate cases.
We are all too regularly consulted on issues raised by minority shareholders and also directors over the mis-deeds of others.
Often where there is no Shareholder Agreement in place to regulate the management of the company.
Whilst a Shareholder Agreement can’t stop a rogue director it does, amongst many other things, enshrine rights including the right to see the financial and trading information of the company.
DIRECTORS HAVE DUTIES
We know the Companies Act 2006 legislates that directors have core duties and these include acting within their powers; to promote the success of the company in good faith, to be independent and use reasonable skill care and diligence. S.171-177.
What if rogue directors breach these duties?
LIABILITY FOR PRE-EXISITNG WRONGDOING
Each director is expected to personally inform himself of the company’s affairs.
Director liability is shared across the Board regardless of whether the director knew or did not know about the misfeasance.
Whilst a director is not liable for things done before being appointed if a director allows the malpractice to continue, the director can then become personally liable. TMG BROKERS LTD (In Liquidation) [2021]
LIABILITY FOR WRONGDOING AFTER RESIGNATION
Anyone who ceases to be a director continues to owe the no-conflict duty – s.175
This means a director can be sued after resignation, in some circumstances.
In BURNELL V TRANS-TAG LTD [2021] the Court held that directors who resign may still be liable post-resignation.
This case tightens scrutiny of ex-directors. Whilst the tax and trading pressures on business might promote unwise decisions it is more important than ever for directors, including non-executive directors (who can also be held personally liable) to keep themselves informed.
PRACTICAL STEPS
Directorships bring influence and also exposure.
Liability isn’t restricted to what a director does or doesn’t do it extends to what directors inherit, overlook or exploit.
We recommend that directors become active, informed and vigilant before during and after their term in office. And if access to information is denied – read the runes.
ALEXANDER BUSINESS LAW SOLUTIONS are lawyers for business and advise directors and shareholders.
Alexander Business Law Solutions is a member of Laurel Leaf Networking.