News of the failed last ditch attempt by the nine non-executive directors of Equitable Life to have negligence claims against them struck out has sent shock waves through the ranks of non-executive directors across the country.
Ironically at a time when the requirements of the new Combined Code have increased the demand for non-executive directors there is concern that the Equitable case will mean that it will become more difficult for companies to recruit people into this role. However, law firm Hammonds believes that the Equitable case should be viewed as an opportunity for a fresh look at the duties and liabilities of non-executive directors and the result may be greater clarity for those considering the role in the future.
Mike Clifford, senior corporate lawyer at Hammonds says: “The recent turn of events in the Equitable saga means that there is now no barrier to the case against the non-executives going ahead as part and parcel of the claim against the entire board. This is clearly devastating news to the “Equitable nine” who have argued throughout that they did what any reasonable non-executive director would do in the circumstances.
“At first glance it also appears to deal a blow to those who argue that non-executive directors are a special case and should not be subject to the same liabilities as the executive directors on the board. However it is important to appreciate that this was just a preliminary ruling, as Mr Justice Langley himself pointed out “this conclusion does not mean I think Equitable’s case is right or even probably right”. In fact there is a silver lining.”
Mr Clifford points out that the law relating to the duties and liabilities of directors developed in the late 19th/early 20th century when boards were composed almost entirely of non-executives who were invariably also the shareholders of the companies on whose boards they sat. He says: “Such boards are a far cry from the modern day board where executives play the key day-to-day management role and the role of the non-executive bears virtually no resemblance to its Victorian equivalent.”
Many non–executives are uncertain as to exactly where they stand when it comes to their legal duties and liabilities – to be told that despite their lack of day to day involvement in the company they are as liable as the executive directors is unpalatable to many 21st century non-executives.
“What is really needed is an authoritative modern day case which considers the duties and the liabilities of the non-executive with a fresh 21st century eye. While of little comfort to those at the centre of it, the Equitable Life case may just be the correct mechanism to achieve this and to bring greater clarity to a role currently shrouded in complexity and confusion.”