Directors’ Liability in the United Kingdom

28-10-2014

Article by Jonathan Silverman, Adam Powell and Paul Collins

1. Are directors liable for management decisions?

Directors Duties under the Companies Act 2006 (the Act)

Directors must comply with the general duties for directors under the Act (s.170-177);
Although directors may delegate certain tasks and responsibilities they retain overall responsibility;
If the directors breach their duties, the company will have a claim against them under Statute; and
Shareholders can bring a derivative action against the directors seeking relief on behalf of the company (s.260).

Common law duties

The following duties apply to the extent that they are not expressly provided for in the Act:

Duty to act bona fide in the interests of the company;
Duty to act for proper purposes;
Duty not to misapply company property; and
Duty to account for a secret profit.

Civil and Criminal liability

Fraud under the Fraud Act 2006 and/or Theft Act 1968;
Insider dealing under the Criminal Justice Act 1993;
Money laundering under the Proceeds of Crime Act 2002;
Market abuse, making misleading statements or carrying on regulated activities without authorisation under FSMA 2000;
Wrongful and fraudulent trading under the Insolvency Act 1986; and
Bribery offences under the Bribery Act 2010.

Additional duties

The Articles of Association and any Shareholders’ Agreement may include additional duties and potential liability for directors.

Directors are responsible for the prospectus when listing a company (see PR 5.5R) and may be liable to compensate an investor if it is misleading or inaccurate (see S90 FSMA).

For listed companies, directors are subject to the relevant listing rules and corporate governance obligations e.g. FRC UK Corporate Governance Code and the Transparency Directive (EC Directive).

2. What are the general criteria for being liable? (Ex. To cause a damage, to act with minor or soft guilt, imprudence, negligence, bad faith, fraud, malice…)

The duties set out in ss 171-177 of the Companies Act 2006 impose different standards to determine whether a director has breached them:

Duty to act within power (s.171) - determined using a subjective test (i.e. looking at the purpose(s) for which the directors were exercising their powers);
Duty to promote the success of the company (s.172) - determined using a subjective test, (i.e. whether the director honestly believed that he acted in a way most likely to promote the company’s success). Nevertheless, a court may be more likely to be persuaded that a decision was not taken in good faith where it is not a decision that a reasonable and intelligent director could have concluded would promote the success of the company;
Duty to exercise reasonable care, skill and diligence (s.174) - has both subjective and objective elements (i.e. at a minimum, a director must display the knowledge, skill and experience set out in the objective test, but where a director has specialist knowledge, the higher subjective standard must be met); and
Duty to avoid conflicts of interest (s.175) - determined with an objective test as it will not be infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.

3. Can directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?

Personal guarantees - The directors of a company are generally not personally liable for the debts of a company. However, if a director has given a guarantee for the liabilities of the company, the director may be personally liable under the guarantee.
Fraudulent Trading (s.213 Insolvency Act1986);
Wrongful Trading (s.214 Insolvency Act1986);
Misfeasance (s.212 Insolvency Act1986); and
Misrepresentation.

4. Can directors be liable in a case of insolvency of the company?

Yes, however it depends on how the directors acted at the time (i.e. did the director take every reasonable step with a view to minimising the potential loss to the company's creditors?).

Is this situation of responsibility frequent in your jurisdiction in insolvency cases?

Insolvency Practitioners will investigate the conduct of the directors of a company upon their appointment and submit a report as to whether the conduct was fit or unfit and whether any further action should be taken. Dependent on the outcome of such investigations, the Insolvency Practitioner may seek to bring an action against a particular director.

5. Are directors liable in the case of closing a business without filing for insolvency?

They can be, particularly, if they continue to trade while the company is unable to pay its debts as they fall due.

6. Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or shareholders?

Unsecured creditors may commence a “winding up” procedure and appoint a liquidator by an application to court.
Shareholders generally have no right to claim against a director for loss they consider they suffered as a result an alleged breach of duty. However they can bring a derivative claim on behalf of the company, as mentioned above.

Is this action successful for recovering the damages suffered by the claimant?

· From the perspective of an unsecured creditor, the success of a “winding up” is often limited due to the fact that priority must be given to other creditors such as the liquidator’s costs and expenses, secured and preferential creditors.