On
The insolvency of Carillion has attracted widespread media and political interest, including two Select Committee inquiries as well as investigations by the
The disqualification trial was due to start imminently on
The proceedings, if successful, would have significantly raised the corporate governance standards NEDs are required to meet. Critics feared that this would discourage individuals from acting as NEDs, transforming the
In this article, we examine the background of the Carillion collapse, the legal standard for NEDs and the implications of the
Background
Carillion was a major
The collapse also raised serious questions about the governance, accounting and oversight of Carillion and its directors, who had authorised a large dividend and received generous salaries and bonuses while the company's financial performance rapidly deteriorated.
Directors' disqualifications
The
- knowingly caused the company to publish misleading financial statements that did not comply with relevant accounting standards; and
- paid a dividend that was not justified in circumstances where the company's performance was faltering. On that basis, the
IS sought a court order under section 6 of the Company Directors Disqualification Act 1986 (CDDA) that the former directors were unfit to be concerned in the management of a company.
The three executive directors subject to proceedings agreed to disqualification undertakings:
-
Five years for
- 11 years for
Zafar Khan (finance director from1 January 2017 to11 September 2017 ) - Eight years for
Richard Howson (CEO to10 July 2017 )
Statements published by the
The
The five NEDs, including the former chairman
NEDs: a strict duty to know the financial position of a Company?
The
What legal standard are NEDs held to regarding the management of a company?
The starting point is that directors' duties, as codified under the Companies Act 2006 (CA 2006), apply equally to NEDs as to executive directors. NEDs are therefore subject to the same overarching requirement under section 174 CA 2006 to "exercise reasonable care, skill and diligence" in the management of a company's affairs.
A company with a premium listing on the
Consistent with this, the Select Committee Report in respect of Carillion had observed "NEDs are responsible for constructively challenging the executives responsible for the day-to-day of a company".
"Bulwarks against reckless exec's" or "delusional" "cheerleaders"?
The Select Committee Report gave a damning summary of the NEDs' performance in this instance: "Non-executives are there to scrutinise executive management. They have a particularly vital role in challenging risk management and strategy and should act as a bulwark against reckless executives. Carillion's NEDs were, however, unable to provide any remotely convincing evidence of their effective impact."
As for the non-executive chairman
The Select Committee Report also passed comment on Senior Independent NED Keith Cochrane, finding that he was aware of shareholders' concerns about the company's net debt and pensions deficit but showed little sign of properly challenging the position.
The NEDs' defence
The defence's position at trial was to be that the
The defence was also set to argue that more than mere negligence is required for a director to be declared unfit to be concerned in the management of a company under section 6 CDDA, and that the
Where does this leave NEDs?
The disqualification proceedings had been widely anticipated as a case which would clarify the extent of duties owed by directors (and NEDs in particular) in respect of financial oversight of a company. Board behaviour would have come under intense scrutiny in the long shadow of damming Select Committee findings, record audit fines, and extensive government-backed
Current practice is well reflected by the recent first-instance decision Secretary of State for Business, Energy and Industrial Strategy v Selby (EWHC 3261 (Ch) [2021]), in which ICC
The duty of a director under s.174 CA 2006 is expressed as requiring "the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director has".
It is arguable that the emphasised words can narrow the requirement placed on NEDs compared with executive directors. The "functions carried out by" a NED may be limited compared with the functions carried out by an executive. There is case law authority confirming that delegation and division of responsibility may be necessary and appropriate in corporate life.
For example, in
And in Singer v Beckett [2001] 4 WLUK 505, a liquidator's claim for wrongful trading and misfeasance was dismissed. Directors were permitted to rely on figures presented by a finance director, having considered and interrogated those figures to an appropriate extent. The judgment noted that if there had been any misfeasance because of the state of the accounting records, that would only have been misfeasance on the part of the finance director and not the others. The judge stated:
I accept that one of the duties of non-executive directors is to monitor the performance of the executive directors. I accept that the managing director of a company...has a general responsibility to oversee the activities of the company, which presumably includes its accounting operations. But I do not think that those responsibilities can go so far as to require the non-executive directors to overrule the specialist directors, like the finance director, in their specialist fields. The duty is not to ensure that the company gets everything right. The duty is to exercise reasonable care and skill up to the standard which the law expects of a director of the sort of company concerned, and also up to the standard capable of being achieved by the particular director concerned.1
This neatly sums up the widely understood position that NEDs can delegate matters or defer to the expertise of others. They do not need to be involved in every detail of the company's affairs. What matters is that they exercise suitable oversight and interrogate information put before them to the best of their abilities and as appropriate for the company's situation.
The recently commenced trial in the BHS litigation (
Comment
The
The fact the case has been dropped may be of limited comfort to NEDs, particularly those in high-profile roles or on the board of companies in financial distress. The
We expect that this area will continue to be subject to intense political debate and the scope for judicial development remains.
Footnotes
1. Singer v Beckett [2001] 4 WLUK 505 at [399]
2. The trial against former BHS owner
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.
Ms
Macfarlanes
EC4A 1LT
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