Non-executive directors are at risk of exactly the same types claims as other directors. Our expert team advises many non-executive directors on their responsibilities - and defends them from claims.
What is a non-executive director?
Typically, a non-executive director may be bought in for a specific skill. For example, a company accountant maybe, or a lawyer, or someone who is particularly skilled in an aspect of business of the company. Their main role might be to supervise the directors, or to bring to the board the specific skillset that they may have.
- it is common, particularly in smaller companies, for non-executive directors to be significant shareholders;
- this is often found in a family run business where there is a non-executive director who is a family member with a large a shareholding in the company, but does not take part in the day to day running of the same. Theirs is essentially an overseeing role.
Non-executive directors are also sometimes appointed in order to supervise aspects of the company or directors. For example, to carry out an independent review. An independent non-executive director may be appointed to oversee corporate governance over company decisions, to check that the company is being managed correctly. This is more likely with a larger company than a small or medium sized enterprise and such a person might be a turnaround expert for example, employed by a lender concerned about the company.
What are the duties of a non-executive director?
The duties of a non-executive director are identical to those of executive directors. The fact that they may not play a day to day part in the running of the company does not mean that they are excluded from any of the standard director’s duties set out under legislation and general corporate governance codes.
What are the risks for non-executive directors?
The risks of personal liability for breach of fiduciary duties, both in a solvent company situation, and an insolvent company situation are identical to those of executive directors.
A fiduciary duty is a duty of trust and confidence between the director and the company. These are largely found under company legislation, the overall theme behind these duties being to ensure that directors exercise skill and care and good faith. These apply no matter what capacity a director acts in, and apply not only to executive directors, but also to non-executive directors and de facto and shadow directors.
- any director found to be in breach of these duties while the company is solvent could be subject to a claim by a relevant aggrieved party;
- the court has the power to set aside or to restore a transaction made contrary to a fiduciary duty;
- it may also injunct certain actions that may be breaching a duty, or provide for a director in breach to make recompense by way of damages.
In an insolvency situation, there are additional remedies and penalties for breach of fiduciary duties. An insolvency office holder who is appointed over an insolvent company has wide and varied powers to take recovery action against a director for breach of duty to the company or to the company’s creditors. Once the company is heading towards insolvency, or has entered insolvency, then the directors’ duties move from the overall duties to the company to also be duties to the company’s creditors as a whole.
Directors’ disqualification proceedings
For full details of the disqualification regime read more in our excellent director disqualification section of the website.
A non-executive director may be able to put forward mitigation to a claim if they have been deliberately kept out of the loop by the executive directors. However, if they have simply failed to keep themselves up to date and there was no deliberate misleading by the directors, this will not be a defence or mitigation to any claim against a non-executive director.
The risk to non-executive directors therefore is the same as that of executive directors. Any non-executive director considering taking a role will need to be very certain of their responsibilities to avoid falling foul of companies or insolvency legislation should a claim be made in relation to the company.
At Francis Wilks & Jones we have many years experience acting for all classes of directors in legal matters, particularly with regard to claims arising from insolvency or claims for breaches of a director’s duties. If you have concerns in this area, contact our friendly team today for a chat. We can help.