2.7.2 General atmosphere of liability

UK company law, like US law, does not make a formal legal distinction between the duties of executive and non-executive directors. Instead, all directors generally bear equal legal responsibility for company actions. Case law suggests, however, that the English judiciary has recognized the part-time role that non-executives play in a public company and is prepared to adjust their duties in case of liability claims accordingly. Sections 174(2)(a) and 1157 also give a ground for a distinction between executives and NEDs. See 2.6.5 above.

Despite judicial recognition of the distinctive role played by non-executive directors, there has been growing concern in Britain about the risk of liability. A catalyst for this concern was a lawsuit brought by Equitable Life, a major British insurer that nearly went bankrupt in the late 1990s, described in detail above in 2.6.5.1 The old board was replaced after the debacle, and the new board sued the auditors and fifteen former directors, including nine nonexecutives, for damages exceeding £3 billion. The non-executive directors sought to have the claim against them dismissed, but this application failed. Equitable had D&O insurance coverage of £5 million, which was insufficient to cover the directors' legal expenses, let alone potential damages. The trial began in 2005, but after the case turned out against Equitable, it agreed to abandon its claim immediately after its presentation and pay the legal expenses of the nonexecutive directors. Despite this outcome, the litigation was often cited as the soit of nightmare that would make the boardrooms of public companies tougher to fill.2

In practice, litigation against directors in the UK is quite rare for various reasons. Primarily because litigation could leave the company worse off than before, because of costs. Often there is an indemnity clause or order in favour of the director. Moreover, the time lost by directors in litigation could be better spent and the company will suffer reputational damage. Directors have more to fear from fines for criminal offences and from naming and shaming. Another possible penalty is disqualification, as in the cases of Westmid (1998), Barings (2001) and Swan (2005) described above onder 2.6.5 — duty of care —, where all the NEDs were disqualified. Disqualification is a court order that a person may not act as director of any company for a period of 2 to 15 years.