Given the current economic climate and recent financial scandals, the performance of directors is likely to be under close inspection. And, with an increasing amount of legislation surrounding the role, it is ever more important than ever that directors minimise the risk of non-compliance, warns Stephen Foster, Head of Corporate at Berg Legal.

The recent Court of Appeal case of Lexi Holdings (in administration) v Luqman and others serves as a timely reminder that non-executive directors may not escape from their responsibilities by taking no action and pleading ignorance.

In this particular case an executive director was alleged to have misappropriated millions of pounds of company funds from Lexi Holdings. The company, by then in administration, brought an action to recover the funds against both that director and also two of the company’s non-executive directors.

The significant point in this case was that the two non-executive director defendants were sisters of the executive director and also aware of his dubious past. They were therefore under an “enhanced” duty to be cautious as to his activities.

The Court rejected the suggestion that the brother would have been able to persuade his sisters that the dubious activities were legitimate, even if they had questioned him in detail. The court concluded that they had not fulfilled their duties as directors properly and had they done so they would have realised the illegitimacy of the transactions in question.

Referring to the earlier case of Re Westmid Packing Services Limited the court confirmed that it is a breach of duty for directors to allow themselves to be dominated by another member of the board.

Following the judgments, the executive director was sentenced to 12-months for the misappropriation of company funds. The administrators also gained a charge over £75m worth of his own assets as well as charges over £100m worth of assets of the two sisters. Stephen Foster, a partner with Berg Legal says “This judgment provides an important reminder that the role of a director, whether executive or non executive, is accompanied by responsibility. Inaction on the part of a director can constitute a breach of duty. If the duty is not taken seriously or the correct rules and procedures are not followed, incurring penalties and fines is a real possibility.

It is increasingly important to minimise the risk of non-compliance with the law by staying properly up-to-speed with the requirements of being a director. Berg Legal’s director training course can assist directors to get it right.”

For further information on director training click here or visit our website www.berg.co.uk or contact Stephen Foster at stephenf@berg.co.uk (T) 0161 833 9211.

The information and opinions contained in this document are not intended to be comprehensive, not to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg Legal, or any of its partners or employees. Professional Legal advice should be obtained before taking, or refrain from taking any action as a result of the contents of this documents.