It is apparent from Court decisions in recent years that there are risks involved for directors who become involved in a company whose business is outside their areas of expertise or knowledge and who rely on the advice of others.
Directors will be held to account if they breach their duties irrespective of whether they are a director involved in the day to day operation of the company or a passive non-executive director.
The case of FXHT Fund Managers Limited (In Liquidation) and Anor v Dirk Oberholster was heard in the High Court in December 2008 and involved Peri Finnigan and Boris van Delden of McDonald Vague as the liquidators of FXHT.
The proceedings, taken by the liquidators, alleged breaches of director’s duties by Mr Oberholster, one of two directors of the company, and the Court had to decide, if it found there were breaches, whether or not Mr Oberholster was entitled to the defence which is set out in section 138 of the Companies Act 1993 (“the Act”).
Section 138 Use of information and advice
- Subject to subsection (2), a director of a company, when exercising powers or performing duties as a director, may rely on reports, statements, and financial data and other information prepared or supplied, and on professional or expert advice given, by any of the following persons:
(a) an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned:
(b) a professional adviser or expert in relation to matters which the director believes on reasonable grounds to be within the person’s professional or expert competence:
(c) any other director or committee of directors upon which the director did not serve in relation to matters within the director’s or committee’s designated authority.
- Subsection (1) applies to a director only if the director—
(a) acts in good faith; and
(b) makes proper inquiry where the need for inquiry is indicated by the circumstances;
(c) has no knowledge that such reliance is unwarranted.
In this case it was found that Mr Oberholster could not rely on the defence for two reasons.
The first issues was that the person whose advice he relied on, the 2nd director of the company who ran the day to day operations, was the very person he was supposed to monitor the actions of.
The second issue was the general nature of the advice provided and the informal undocumented manner in which it was provided.
This case highlights the need for ALL directors to ensure that they know what is happening within their company -
- by asking the appropriate questions of the people who are managing the business on a dayto day basis – including other directors; and
- by seeking the relevant financial reports, information and data.
They must also ensure that what they receive is relevant, sufficiently detailed and properly documented.
If you would like more information about the requirements on directors and the types of advice you should be seeking please contact our offices.