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A director who is guilty of a breach of his duties to a company, and who fails to disclose this, may be subject to an ongoing threat of liability notwithstanding the expiry of any limitation period relating to the original breach, according to a leading corporate lawyer.
“A director has a number of duties to the company, such as a duty to avoid conflicts of interest,” says Philip Round, a partner at George Green LLP.
“Many of these duties are now enshrined in the Companies Act 2006. The case of Fassihi -v- Item Software (UK) Limited twelve years ago appeared to impose on a director a further duty to disclose his own misconduct to the company. Whilst this is considered to be an extension of the fundamental duty to promote what the director considers, in good faith, to be the interests of the company, the decision created significant controversy.”
Mr Round explains, “according to case law, the duty of disclosure applies to any breach of duty or misconduct, for example a negligent mistake, if a director acting in good faith would have concluded that disclosure was in the best interests of the company. It does not only apply where disclosure is necessary to avoid a conflict of interest arising.”
“The more recent case of Haysport Properties Ltd -v- Ackerman has demonstrated the significance of such a duty. In that case, a director had breached his duty to avoid a conflict of interest by approving the grant of security by the relevant company to support a facility advanced to a separate business in which the director was interested. The claim relating to the original breach of duty would have been time barred had the director not been subject to an additional, continuing duty to disclose the original breach for so long as he remained a director. There was no limitation issue in relation to the subsequent breach of the duty to disclose.”
Mr Round concludes, “It is arguable that the duty to disclose, which many commentators believe to be an unnecessary development in the law of directors’ duties, rarely makes any difference in practice. A director is unlikely to decide to disclose a breach of duty which took place many years ago and has probably not had any long term impact on the company. Directors should be aware, however, that the passage of time will not necessarily enable them to avoid liability if the breach subsequently comes to light.”
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