Possible liabilities of directors.
The role of Company Directors
A company is a legal entity; it can own property and enter into contracts. Of course, the decisions about these things are made by directors of the company or the managing director to whom other directors have delegated their responsibility for day-to-day running of the company. Decisions may also be made by senior employees acting on behalf of the directors. Irrespective of who makes the decisions, directors must ensure that certain minimum requirements are met as set out in the following:
- Companies Act 1989-2006;
- Insolvency Act 1986; and the
- Financial Services Act 1986
In addition directors must make sure the company complies with other legislation including that relating to health and safety, employment, taxation and the environment.
Types of Director
There are several types of directors.
- Executive Directors – involved in day to day
management or employees of the company including the Managing Director who runs the company on behalf of the Board of Directors.
- Non-Executive Directors – not involved in day to day management. They will be expected to give an impartial view on matters before the board.
- Shadow Directors – someone who, although not an appointed
director, the directors act on their directions or instructions.
- Alternate Directors – appointed by a director to represent them at board meetings
provided that the company’s Articles of Association allow this and
other directors do not object.
- Nominee Directors – may be appointed at the request of an interested party, such as a finance house, to protect its interests.
- De facto Directors – although not appointed, act as a director with authority to make management decisions.
Exposure to risk
Every decision a company makes has the potential to put the directors at risk which could result in personal liability such as a fine, compensating shareholders, a term of imprisonment, bankruptcy, or Disqualification of up to 15 years from having any involvement in the setting up or management of a company without the permission of the Courts. Although there is a frightening amount of legislation covering directorships and operating a business, there are a number of things directors can do to reduce their potential liability. Although it is not possible to cover all considerations comprehensively here, directors should:
- always act responsibly and prudently;
- be continually aware of the company’s financial position, its assets and liabilities;
- not make misrepresentative or misleading statements orally or in writing or agree with such statements made by others;
- be aware of what fellow directors are up to; and
- If in doubt about any matter seek professional or legal advice at the earliest opportunity.
Risk of liquidation
One of the biggest risks to directors is the company becoming insolvent. Directors must not ignore clear signs that a company is in trouble and heading for Insolvency. In particular they must not continue to accrue debt and should take the following steps:
- call a board meeting to expose the situation, prompt discussion and decide on next steps. It is important that correct and detailed records are kept of any discussion;
- seek professional advice and document advice given;
- prepare a statement of the latest company position in terms of assets and liabilities;
- if necessary, approach a Licensed Insolvency Practitioner and invite them to the board meeting. In an insolvent liquidation Insolvency Practitioners must report to
BIS (the former Department of Trade and Industry) on the actions of directors. If the behaviour of a director is
in question, Disqualification can follow and they could become personally liable for debts.
The consequences of questionable or illegal
Directors who ignore signs that a company is in trouble can be asked to contribute personally to the assets of that company during liquidation. This applies to anyone who has been a director in the 12 months before the liquidation. In addition, directors will also be liable if they have given a personal guarantee on debt repayment or have misled a third-party into believing they are acting on their own
account and not as a director of a company. Directors who exceed their authority or breach their financial duties are also
potentially liable. Directors who behave illegally by fraudulently amending or removing company records or property, attempting to conceal debts or other pertinent information from other directors, shareholders, or an Insolvency Practitioner could be subject to the full weight of the law. This includes those directors who, whilst perhaps not taking part in activities themselves, are nevertheless aware of them
and fail to take action.
Civil and Criminal Liability
Directors can have civil or criminal liability or both depending on their actions. Civil liability is principally concerned with mis-statements or misrepresentations (Misrepresentation Act 1967) that have caused a shareholder to behave in a way they would otherwise not have done, resulting in them incurring a loss which could reasonably have been foreseen. Redress can be sought from the person who made the mis-statement or misrepresentation or from the company. Any agreement entered into by a shareholder because of mis-statements or misrepresentation is likely to be rescinded. If a director makes a statement which they know is false, promises something they cannot deliver, or engages in misleading, false or deceptive behaviour and a person acts on the basis of that advice, the director
can be criminally liable under the Financial Services and Markets Act (FiSMA). Additionally, under Section 15 of the Theft Act 1968, it is an offence to dishonestly obtain someone else’s money or property by deception with the intention of permanently depriving them of it.
Basic requirements for directors
There are a few basic requirements which help protect directors. These are as follows:
- ensuring that the company's financial position is always transparent by maintaining proper book-keeping and accurate accounts to inform the Annual Report and Balance Sheet;
- filing the accounts and other relevant documents with the Register of Companies and submitting accurate records to Her Majesty’s Revenue and Customs.
- filing any special or ordinary resolutions made by company shareholders with the Companies Registry.
- informing the Companies Registrar of changes to the board, the company secretary or the address of the company’s registered office.
- appointing auditors;
- calling and holding an Annual General Meeting; and
- making sure that the company complies with its Memorandum and Articles of Association.
A company can take out Directors’ and Officers’ Insurance to protect against liabilities for negligence, incompetence or breach of trust, providing fraud, dishonesty or criminality is not a contributing factor.
Civil Liability (Contribution Act) 1978
Under the above, someone who is liable to pay damages can, in some circumstances, claim from others considered to be liable, providing they have not previously agreed to indemnify the person whom they are now approaching.