Directors & Officers Liability - Claims Examples
One of the most complex problems facing business today is the liability of corporate directors and officers. In performing their duties the individual directors and officers face personal and professional risks with every decision they make. These decisions are subject to significant scrutiny from shareholders, financial partners, stakeholders, customers, employees and even their competition. This coupled with the complex web of UK legislation and the ever-increasing burden of European Union directives.
Good corporate governance can mitigate the risks but can never eliminate their potential liability. It must always be remembered that although a company's liability may be limited its directors and officers are not.
It is plain to see that directors and officers have a complex and challenging job. This job has been made even more difficult in the following ways:-
- The range of those falling
within the scope of the term directors and officers is widening.
- The continuing legislative
environment and the fine tuning of the Companies Act 1989 and other
such statutes.
- The development of the
'whistle blower' culture which has been confirmed by the Public Interest
Disclosure Act 1999.
- And finally the tendency when financial or physical
disaster strikes for the injured parties to seek not only damages but
personal scapegoats has grown. Public attitudes continue to harden toward
errant individuals.
Even in the face of these grim facts many directors
and officers think they will never become target of a claim. With this
in mind just look at the following examples:-
Creditors
- A Company went into liquidation shortly after
one of its directors ran up a bill with a vehicle repairer for the cost
of repairs carried out to a company vehicle. The cost was incurred on
behalf of the company. The vehicle repairer brought an action for the
outstanding invoices and there was a suggestion that the director was
liable personally in view of the provisions of the Insolvency Act.
- A Director who signed a company cheque whilst
the company was in receivership, found that the cheque was dishonoured
and he was held personally liable to the payee.
- An affidavit given by a director contained a statement
that the company had sufficient resources to meet a solicitors' fee
in respect of an action being brought against the company. Before the
fee was paid, the company went into liquidation. The solicitors are
seeking some £300,000 from the director personally.
- A director made a speech at a conference stating
that his company was making a bid for another company and that his company's
merchant bankers had disclosed details of the bid to another bidding
company. A claim was brought by the bankers refuting that they acted
as described.
- A bank has taken action against the directors
of a retail company for failure to disclose material facts when they
entered into a financing agreement worth £8.5M with the bank.
The projected cash flow for the subsidiary showed that the loan was
un-substainable. The bank accused the directors of providing misleading
information
Competitors
- A former director of a company was sued for alleged
misappropriation of trade secrets which he obtained from the company.
- A company is suing the directors of one
of its competitors for allegedly breaching trade practices.
Contractors
- Directors of a construction company were successfully
sued for losses incurred by an architect who relied on a director's
repeated assurances that a contract performance bond had been arranged.
Customers
- A director who accepted an order at a trade fair
but couldn't recollect the details the following morning found himself
being sued by his customer for breach of contract
Employee
- An action for breach of trust was brought against
a director following the release of an employee's medical records.
- A director's service agreement was terminated
by his employers (the insured) after alleging sexually harassment. The
director successfully sued the company for wrongful dismissal and libel.
- An employee is seeking damages of between £200k
and £250k for an alleged error in a notice of termination of service
agreement.
- A director found himself defending an action,
brought under sex discrimination legislation, following the dismissal
of a pregnant employee.
Government/Regulatory
- A director is being prosecuted in Europe for claiming
an export subsidy on meat which was allegedly being exported to South
Africa. The meat, in fact, was being exported elsewhere where no subsidy
was available.
- The manager of a bank which operated a discretionary
currency portfolio started to roll forward unprofitable deals, which,
when "closed", lost the bank in excess of £21m. The
Bank of England threatened to take away the bank's licence and disciplinary
proceedings commenced against the directors. The disciplinary body has
the power to debar the directors from holding office within the banking
field. Legal costs, estimated to be a six figure sum are being incurred
in representing directors before the disciplinary body of the Bank of
England.
- The Company Secretary (as licencee) for all the
bars owned by a leisure group was prosecuted for short measure being
served at one of the bars.
- The directors of a company which failed to comply
with the time limit for delivery of accounts to the Registrar of Companies
and then did not disclose certain directors' appointments were prosecuted
under the Companies Act.
- Directors were prosecuted after their failure
to identify the company correctly on the company notepaper and invoices
in breach of the Companies Act.
- The chairman of a company was investigated by
FIMBRA for employing someone of "dubious character" and then
failing to exercise proper control over him. He was acquitted and is
now seeking the costs for his defence from FIMBRA.
- The bar staff of a company were allegedly paid
without deductions for tax (apparently without the knowledge of the
directors). The Inland Revenue are considering bringing proceedings
against the directors.
Liquidators/Receivers
- Two directors of a company which was in liquidation,
with a total deficit of £216,000, were held jointly for £75,000
damages (plus interest and costs) arising from wrongful trading whilst
the company was insolvent.
Other Third Parties
- Two directors signed a confidentiality agreement
for receipt of papers from a company which was potentially the target
of a bid by a third party. The papers were allegedly released and the
target company are intimating that the sale price was affected.
- After a disaster at sea a director accused a firm
of solicitors of "ambulance chasing" at a press conference.
The solicitors brought an action for defamation and defence costs were
paid.
- A company which was been the subject of a take-over
bid had a disappointing first year's trading. The purchase price for
the company contained a performance adjustment clause. However an oversight
in drafting the contact meant that price could not be adjusted. The
Board sued the solicitors. The solicitors counter claimed against the
two directors who had signed the contract.
Purchasers
- A Manchester based clothing manufacturer sought £12,000,000 in damages against five former directors of a company
they purchased in 1994 alleging they were mislead as to the value of
that company.
- A company has issued proceedings against two of
the directors of a company it acquired. It is alleged that the former
directors made negligent misstatements and misrepresentations to the
purchasers and substantial damages are pleased as a result.
- Company A invested in company B relying upon a
statement of working capital that Company B made to its shareholders.
Company B has subsequently gone into liquidation and the shares which
cost £175,000 are now worthless. Company A contend that the statement
was misleading and have brought an action against B's directors.
- A company's director made financial representations
to identified bidders for their company, aware that and intending that
bidders would rely on these, as they did. Court of Appeal held that
if the representations were proven negligent, the directors (and others)
would be liable for the breach of their duty and care. Negligence was
never established as the matter was settled out of court. Significant
defence costs were however paid on behalf of the directors.
Shareholders
- Shareholders brought an action for mis-management
against the directors of a company which had suffered exceptional losses.
The directors were able to successfully defend themselves but sizeable
legal costs were incurred.
- Shareholders claimed for losses they incurred
due to the premature sale of shares following allegedly misleading statements
by the directors.
- Six shareholders claimed misrepresentation by
the directors of a company regarding the state of affairs of a subsidiary
and the support the company would receive from its bank. The shareholders
claimed that their preference shares could not be redeemed as a result.
- A Company breached its articles of association
by payment of dividends out of capital profits opening itself up to
potential claims from shareholders.
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