Non-Executive Director Liability

Regular readers of our blog will know that we have warned over recent years that non-executive directors are at an increasing risk of facing claims in relation to breaches of duty by executive directors, which in turn have been the cause of non-executives breaching their own duties. Non-executive directors broadly owe the same duties to a company, It’s members, and on insolvency, it’s creditors, as executive directors do. That means if they are not exercising the appropriate oversight and, for example, executive directors dissipate significant sums of cash, then on insolvency an administrator or liquidator might make claims against non-executive directors.

Things have become more complicated because we understand that the premiums for director and officer insurance have increased considerably over recent months in some case. That, however, remains a starting point for any non-executive director – you want to ensure you are properly insured for the risks that are being taken. You also want to ensure that you are being properly remunerated given the increased risks. If there ever was a day that non-executive directors could simply turn up to a board meeting once a quarter and forget about a company for the remaining two months and twenty nine days before the next meeting, then those days are well and truly over!

However, even if insured, that is not the end of the matter. Non-executive directors do not want the stress and time imposition of dealing with a claim by office holders. That means as Government support is withdrawn as we move into the next phase of the pandemic recovery it is vital that non-executive directors are ensuring executives are getting the right advice in terms of planning for the “new normal”; and then that advice is followed!  Non-executive directors don’t want to be guilty of wrongful trading or other breaches of duty by proxy. It is therefore vital that they have an understanding of a company’s cash position, of the run rate and whether there is a reasonable robust recovery plan in place.

Non-executive directors should take their own advice if they have concerns about the position they find themselves in. As we have commented before, it may actually not be enough for a non-executive director simply to resign if there is a breach of duty by executives; there may be a positive obligation to report breaches to authorities, regulators and certain creditors in particular circumstances.

Insolvency Lawyers Edinburgh, Wick and Aberdeen, Scotland

BBM have substantial experience in advising boards and non-executives. Please contact us if we can be of assistance.