THE new Companies Act places considerably greater personal financial risk on company directors than its predecessor. Directors’ personal liability has long been an issue for companies and directors. The law has been criticised on the grounds that its directors’ liability provisions militate against individuals accepting appointment as a director, or continuing to act as a director. That’s especially applicable to nonexecutive directors because the risk of personal liability is too great relative to the fees directors normally earn.
Apart from the different degrees of care and skill that arise from specialist skills and the degree of involvement in daily management, there is no difference in law between the duties and liabilities of executive directors and nonexecutive directors.
The heightened criticism of the new act is that, for the first time, the duties and liabilities of directors under the common law have been partially codified. These prevail over any conflicting common-law duties and liabilities. If there is no such conflict, the common law remains applicable.
The common-law duties and liabilities of directors have, in most respects, not been altered by this codification to the detriment of directors. Quite the opposite, in fact — the codified duties of directors are more lenient than those of the common law in some important instances.
There are four reasons a director faces much greater personal financial risk under the new act: a director’s statutory duties have been increased, making it more difficult for directors to do their job properly; powerful new remedies are available to aggrieved shareholders against directors who do not do their jobs properly; remedies against directors are not only retained but are also wider in their scope and easier to implement; and the new enforcement regime should prove to be more efficient and effective, rendering it more difficult for recalcitrant directors to avoid personal liability.