Directors' duties under siege – The status quo prevails

The predictability and depth of development of company law in the UK has long been seen as a competitive advantage and national asset for the UK, including by politicians across the divide in developing the Companies Act 2006 (CA2006).

Directors’ duties and liabilities are a central part of that company law regime.  Until their codification in the CA2006, the general duties owed by directors to their appointing companies were encapsulated in, and developed through, the common law. For years, landmark decisions such as Aberdeen Railway Co v Blaikie Bros and Re City Equitable Fire Insurance have been pored over by law students and legal practitioners alike, as the guiding authorities on the scope of the duties owed; decisions which have been tested and expanded by subsequent judicial rulings.  Part 10 of the CA2006 set out for the first time a statutory statement of the general duties owed by directors to their appointing companies. The Act made clear however that the rules and principles developed through case law remained relevant: Section 170(3) states (emphasis added): "The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director".  

Notwithstanding the codification, which sought to make limited changes in practice to the duties, the core of the duties remains consistent with the pre-codification law. The courts have retained a key role in the interpretation of directors' duties and they continue to be reluctant to interfere with management decisions, absent clear evidence of conflict or default.  Although they arose in very different circumstances, the claims advanced in both the Carillion proceedings seeking disqualification of the former non-executive directors (NEDs) and the ClientEarth derivative shareholder proceedings sought to test the limits of the statutory statement of directors' duties and the courts' role in their interpretation. Had the applicants in either of these proceedings succeeded, the impact would have represented a fundamental change to the legal role of directors and added significant liability burden and risk to those carrying out their roles as directors.  The good news is that neither case has caused such a challenge or rethink for directors.

Post Carillion and ClientEarth: the status quo prevails

Despite the intense interest that these two situations generated, if there are lessons to be learnt from their outcomes then these lessons include that the law on directors' duties in England and Wales remains well developed and the courts will generally not be amenable to novel extensions of these duties. The Carillion and ClientEarth proceedings can act as a useful opportunity to remind directors of the practical steps that they can take to comply with the duties they owe (see checklist below). 

Whilst ultimately these proceedings have not changed this area of law, there is a development potentially still on the horizon which could have a significant impact.  As part of its consultation on reforms to audit and corporate governance, which was instigated originally in 2017, in part in reaction to the collapse of Carillion, in May 2022 the then government proposed empowering the Audit, Reporting and Governance Authority (ARGA), the successor regulator to the Financial Reporting Council, to have expanded direct regulatory authority over directors.  The proposed expanded remit would include regulating and then bringing and adjudicating enforcement actions against larger company directors for alleged breaches of their duties in relation to the preparation and audit of company accounts and other disclosures, notwithstanding the pre-existing roles of the courts and the Financial Conduct Authority (FCA) in this area.

Since then, these reform proposals, along with the trend for ever greater burdens on legitimate businesses, have been more widely challenged (see our article "All change please: Governance reform proposals round-up" for more on reforms in this areas). The asserted benefits of various measures have been questioned in a recent more evidence-based political context for business regulation. However, uncertainty remains as to which, if any, of the proposed ARGA reforms will be adopted going forward. There is widespread support for a number of the proposed reforms regarding the ARGA’s status, funding and information powers. In contrast, there are considerable concerns about the proposal for the ARGA effectively to become the rule maker and prosecutor for directors’ disclosure responsibilities and for its tribunals to replace, or duplicate, the courts and the FCA tribunals as the relevant judges of these issues. Such a proposal would in practice supplant the role of the courts as the trusted and experienced adjudicators of directors’ duties, as well as duplicating the remit of the FCA in relation to directors of listed companies.

If reform of enforcement of directors’ disclosure duties are further considered, the importance of preserving the longstanding trust in and value of the courts’ role in regulating directors’ duties must not be underestimated. It is suggested that any further reforms in this area need to be approached with an evidence-based mindset, care for UK competitiveness and recognition of the realities of what individuals can and cannot achieve in governing businesses. That approach was largely absent from the development of the 2022 proposals, where the company law and directors’ duties and liability implications were barely acknowledged.

Selected advice for NEDs following these cases^[1]