UK: Directors’ and Officers’ Liability Review, Summer 2006

Review

The Employment Equality (Age) Regulations 2006 come into force on 1 October 2006 and, subject to some significant points of detail, broadly follow the pattern of other anti-discrimination regimes. It will now be unlawful not only to discriminate directly or indirectly against a person based upon their age, but also on the basis of their ‘perceived’ age – a concept that could prove difficult to apply in practice.

Given the experience of personal liabilities of directors for sex and race discrimination, this new regime is bound to be seen by them as a worrying development. We will be examining the practical implications in detail in the next edition of this Review.

The EU Council of Ministers adopted a Directive in May that will usher in a series of further amendments to the ‘Accounting Directives’, the European legal framework for corporate accounting. The UK and other member states have two years within which to implement this new Directive, running from when it is brought formally into force.

Key features of the new Directive include imposing collective responsibility at board level for the company’s accounts – a potentially fundamental change, given the traditional UK approach of individual liability. The European Parliament has declared that this is not intended to create any new law on liability, and that "responsibility and liability are separate, the one does not automatically entail the other". This may, however, prove a difficult distinction to draw, and as always we will need to see the detailed implementation plans.

Directors, like any other professional, will wish to see a clear cut-off date to potential liabilities resulting from their activities. Uncertainty in this area makes life difficult when, for example, planning appropriate run-off insurance arrangements. The law of limitation exists to give this finality (by preventing claims being made after a certain period has passed), but the courts have wrestled with how to balance this against not unfairly shutting out claimants with genuine grievances. The House of Lords has recently handed down two landmark decisions on the law of limitation which demonstrate the ongoing practical difficulties over striking this balance.

The decisions in Haward v Fawcetts and Law Society v Sephton & Co concerned the two routes by which claimants typically seek to extend the limitation period and bring what would otherwise be time-barred claims: (1) the alternative period of six years from the date on which the claimant first suffered ‘damage’; and (2) the additional three year period from the date on which the claimant first had the relevant knowledge for bringing the claim.

Although the decisions are not all bad news for directors and those who insure them (the claimant lost in Haward), they are unhelpful because they emphasise hair-splitting factual distinctions over exactly what amounts to ‘damage’ and ‘knowledge’ for these purposes. Rather than being able to apply ‘bright-line’ tests to strike out claims at an early stage, courts will increasingly have to sift through the parties’ evidence before deciding whether to allow the action to proceed. Claimants can be expected to make extensive use of both cases to prise open the door to stale claims still further. Even if such attempts are ultimately unsuccessful, this will mean cost, inconvenience and adverse publicity for defendants.

The Government published its response in March to the critical review of the Corporate Manslaughter Bill (the "Bill") by the Home Affairs and Work and Pensions Joint Committee. Although overall adopting a robust approach towards the Committee’s concerns, the Government did acknowledge that clarification was needed in a number of areas. The new test by which a company may be held liable where death is caused by the failure of "senior managers" will now be re-examined, and the Government will also review the interaction between the Bill and the existing sanctions regime under the Company Directors Disqualification Act 1986.

According to the 2006 BDO Stoy Hayward Fraud Track Report, the value of employee fraud has increased by over 80 per cent since 2004, and has doubled since 2003. Half of this was suffered in the financial sector. Fraud on this scale presents a range of practical issues for companies and their directors, especially having regard to their responsibilities under the Combined Code to identify key risks. Indeed, these responsibilities are due to be made part of the new statutory ‘business review’ regime. Given the central importance of early detection and prevention, it is worrying that the same report identifies concern amongst employees over possible victimisation if they were to come forward as whistle-blowers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.