When Directors Get Burned: Liability for Corporate Misconduct Before and After Office

Can a director be liable for misconduct that happened before they joined the board, or after they left it? The answer is yes, potentially. Both scenarios are increasingly being tested in litigation, insolvency proceedings, and regulatory actions.

This article explores the scope of a director’s liability for continuing a problematic policy they did not create, the consequences for failing to act on known wrongdoing, and exploiting corporate opportunities post-resignation.

Liability for Pre-Existing Corporate Misconduct

The first place to start, as always, is with directors’ core duties (ss.171–177, Companies Act 2006). To summarise briefly, once appointed, every director owes statutory duties to the company, regardless of when a questionable practice began. These include:

• duty to act within powers (s.171).
• duty to promote the success of the company (s.172).
• duty to exercise independent judgment (s.173).
• duty to exercise reasonable care, skill and diligence (s.174).

These duties are personal and non-delegable, even for non-executive directors or those joining a board. Each individual director owes personal responsibilities to inform himself of the company’s affairs and join with his fellow directors in supervising them.

Acquiescence and Continuing Wrongdoing

Generally, a new director will not have primary liability for things done before he became a director, however, it if he then handles previous practices of other directors, or allows them to continue, he could be in breach of his core duties as a director. 

Therefore, a newly appointed director who becomes aware of a flawed or unlawful practice cannot simply rely on others to deal with it. They must take active steps to investigate the issue, challenge or stop the practice if improper, ensure proper reporting and board awareness.

In Re TMG Brokers Ltd (In Liquidation) [2021] EWHC 1006 (Ch), ICCJ Burton held that a director who “knowingly allows a practice to continue” may be taken to have authorised each individual breach, even if they did not personally implement it.

Furthermore, in Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) the Court found that a director who stood by during a co-director’s misapplication of funds could be jointly liable for breach of fiduciary duty.

Liability After Resignation: s.170(2)(a) and Corporate Opportunity

Under s.170(2)(a) of the Companies Act 2006, a person who ceases to be a director continues to owe the no-conflict duty under s.175, but only as it relates to “… the exploitation of any property, information or opportunity of which he became aware at a time when he was a director…”. This means that a director can still be sued after resignation if they appropriate a maturing business opportunity learned of during their tenure.

Cases of Interest: 

In Foster Bryant Surveying Ltd v Bryant [2007] Bus LR 1565, the Court of Appeal held that directors who resign may still be liable if there is a causal connection between a pre-resignation breach and a post-resignation gain.

In Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch), the court took a more expansive view, holding that a post-resignation breach of the s.175 no-conflict duty could suffice without needing a separate breach prior to resignation. This approach arguably expands s.170(2)(a) and reflects a tightening of scrutiny on ex-directors who exploit their former roles.

Relief Under s.1157 CA 2006: Not a Get-Out Clause

Directors often attempt to rely on s.1157 to excuse themselves from liability for breach of duty, arguing they acted “honestly and reasonably”. However, courts apply this provision strictly. The burden is on the director to prove both (1) subjective honesty (Hamuel Reichenbacher Ltd v McDermott [2022] EWHC 623 (Ch), [60]), and objective reasonableness based on their skill and experience (Cullen Investments Ltd v Brown [2017] EWHC 2793 (Ch), [10]). Even then, relief is discretionary. Gross negligence, passive acquiescence, or failure to investigate obvious wrongdoing will almost never qualify for relief (Northampton Regional Livestock Centre Co Ltd v Cowling [2014] EWHC 30, [160]).

Checklist for Understanding the Exposure of New and Former Directors

Check the risk of liability for historic misconduct such as insolvency, in particular any fraud-related or misfeasance claims.

New directors should be encouraged to actively investigate existing policies and practices. Any concerns that are found should be documented and raised.

Keep under review whether any post-resignation activity for involve the use of any “maturing opportunity” that arose during directorship.

Departing directors should understand that this can include any commercial opportunity that was pursued by their former company, discussed at board level, or even merely that the director became aware of because of their position.

Do not rely on section 1157 of the Act as a cover-all protection, the Court rarely grant relief where directors failed to question dubious practices or allowed others to dominate decision-making.

Directors (even non-execs) should be encouraged to keep records of their decisions and the commercial reasoning behind it. Especially in boards dominated by strong personalities. 

Conclusion

Directorship brings not only influence, but exposure. Liability is no longer confined to what directors do, or fail to do, during their term. It extends to what they inherit, overlook, or exploit.

In today’s enforcement climate, directors must be active, informed, and vigilant before, during, and after their time in office.