Member Article

The increased scrutiny on company directors means there is an onus on them to be aware of their roles and responsibilities.  As the recent Residence receivership case showed, company directors are facing greater scrutiny than ever by the courts.

While many cases arise because of personal borrowings or guarantees, many relate to whether a director has acted honestly and responsibly as a director. 

So what does the law expect from directors? 

Basically, the board's role is to oversee the management and affairs of a company on behalf of its shareholders. In doing so, each director must act honestly, responsibly, in good faith and with care, skill and diligence. While the duties of directors haven't really changed, greater accountability and higher governance standards are being imposed on directors in how they carry out their responsibilities. 

Frequently, the behaviour of individual directors is examined only following a corporate crisis or insolvency (that is, with the benefit of hindsight, after things have gone wrong). 

Where a director is found wanting, there may be personal financial liability - and, importantly, reputational impact.  But even though many recent cases arise from insolvency, there have been clear signals on what the courts regard as good governance. 

In one recent case, the High Court found directors to be irresponsible because the company did not maintain adequate financial information and monitoring systems. In another recent case, the High Court disqualified a director who (among other things) put creditors at risk in his anxiety to keep the company alive. The Irish and British courts have moved away from older, laissez-faire principles of directors' accountability.  

One court recently stated that ''directors have - both collectively and individually - a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors''. 

Another court pointed out that ''the exercise of the power of delegation does not absolve a director from supervising the discharge of the delegated function''. 

For directors of insolvent Irish companies, a highly significant obligation was imposed on liquidators by a 2001 company law amendment. 

Liquidators now have to bring proceedings for ''restriction orders'' against directors of a failed company - even where the liquidator believes it inappropriate - unless the Office of the Director of Corporate Enforcement (ODCE) agrees otherwise. In effect, this requires the director to show he acted honestly and responsibly.  The mandatory nature of the process has attracted criticism in light of the impact on directors' reputations, even where they are cleared. 

Similarly, increased shareholder activism - originally more from US-based shareholders, but now more widespread - is forging a change in the relationships between shareholders of listed companies and their boards in the area of governance. This year should also see the enactment of the long-awaited Consolidated Companies Bill. One feature is the partial codification of the court-based or common law duties of directors into eight non-exhaustive principles. 

In theory, this should not add to those duties. In practical terms, though, codification will lead to a sharper focus on the behaviour of directors when things go wrong. Some companies may also apply specific additional codes or rules to their directors beyond their general duties. Examples include PLCs - which need to comply with stock exchange and market abuse rules, and acknowledge best practice guidelines set out in the Combined Code on Corporate Governance. 

Other examples include the regulatory and supervisory regime for certain industry sectors, such as that of the Financial Regulator in the financial services industry. 

The recent publication of the Walker Review in Britain will almost certainly give rise to a further updating of the Combined Code on Corporate Governance to make boards more effective, and will be relevant to Irish PLCs.  Greater accountability is requiring boards (particularly non-executive directors) to be more willing to challenge management decisions and question corporate governance. As a result, non-executive directors are increasingly asking where the boundary lies between appropriate delegation and fair reliance on the one hand, and neglect on the other. 

So what can the responsible director do? All directors must have - or acquire - a thorough understanding of what the company does and its key risks. 

They must also be satisfied that the company has a good culture of governance and compliance. For PLC directorships, training - or at least briefings from professional advisers - ought be considered. 

In addition, directorships should not be taken on unless one has the time to attend and participate fully in all board meetings and board business. 

With PLCs in particular, proper consideration needs to be given to the work of board committees, which can sometimes be more time-consuming than main board participation. 

Importantly, if the company approaches insolvency, directors should be aware that their duties extend to the company's creditors. It becomes critical that the directors receive accurate and comprehensive financial information frequently and meet monthly (if not weekly).  It is also critical that their actions be documented carefully and that the company cease to trade if the directors do not believe that it will be able to pay its debts as they fall due.  It would also be prudent to consider directors' and officers' insurance (D&O insurance).  Such policies offer comfort that indemnity funds are available, but can also give comfort on defence costs. 

On a positive note, the courts are not looking for infallibility, 20-20 hindsight or a counsel of perfection. At the highest level, the courts have shown great reluctance to question common sense and sound business decisions from professional boards which take their responsibilities seriously. 

A & L Goodbody - Dublin Ireland