Risks for non-executive and nominee directors – could you be personally liable?

Non-executive directors, whether acting in an oversight role or as the nominee of a lender or investor, often assume that their legal risk in accepting appointment can be limited by focusing on their own conduct and activities and, ultimately, that resignation will bring any legal risk to an end.  New enforcement policies from Companies House call these assumptions into question and could result in these directors becoming personally liable for non-compliance in ways which resignation cannot avoid.

It is often unappreciated that there is no legal distinction in UK companies law between an “executive” director and one appointed for governance or oversight purposes, whether in an advisory capacity or to protect the interests and inform the decision making of an investor or lender.  Directors who do not work full time within the business or exercise management authority are still subject to the same statutory duties as any other directors and to any company law obligations imposed on them as on any other director.

These obligations include ensuring that statutory accounts and annual reports are filed on time.  Failing to file accounts can result in civil penalty fees of up to £7,500, but recently there has been an uptick in prosecutions of directors of recalcitrant companies, resulting in criminal convictions.  In addition to substantial fines which accrue on a daily basis, convictions for failing to comply with filing requirements can result in disqualification from acting as a director.

Boards of directors are collectively responsible under section 451 of the Companies Act 2006 for ensuring that reports and annual accounts are filed, regardless of whether practical responsibility has been conferred on one director or on a company secretary.  Although a director may defend themselves by proving that they took all reasonable steps to secure a timely filing, this does not permit them to assume that a fellow officer would fulfil the obligation.

A “non-executive” director who does not have a direct management role in the company may be unable to bring the company into compliance without the cooperation of other officers, due to lack of access to records and data or lack of access to electronic filing details.  Section 451 of the Companies Act clearly states that the board’s failure to prepare accounts or reports will not be a defence to a director’s liability for non-filing.

Critically, resignation will not offer any protection for a “non-executive” director who is unable to remedy the noncompliance.  Under section 451, liability falls on every person who was a director at the time at the end of the relevant filing period. A director who resigns because they cannot convince their fellow directors to bring the company into compliance can thus put themselves into a worse position, having given up the powers and rights of their directorship.

Given the risk of prosecution and their potentially limited leverage over their fellow directors, “non-executive” directors should familiarise themselves with and carefully monitor all filing requirements, ensuring that they are aware of how, when and by whom annual filings will be prepared and filed, verifying that these filings have in fact been made in good time and keeping documentary evidence as proof that they have taken all “reasonable steps”.  If filings cannot be verified, the director should be prepared to tender their resignation in advance of the filing deadline.

How we can help

Non-executive directors or lenders, investors or members appointing non-executive directors who are concerned about potential liability should contact our commercial dispute resolution team for help and advice.