In September 2011 TM’s legal supplement identified a growing trend for executive culpability for a host of issues from compliance with health and safety standards to acts of bribery, wherever these are breached in the company, and for transparency of accounts and transactions. Don Wightman is chairman of Directors Premier Services and runs his own consultancy advising boards on risk management for directors.
Here he sets out just how suddenly and easily executives can find themselves facing the bared teeth of the law – a lesson learnt from harsh experience when, while running a previous business, he faced a multi-million pound civil claim in a two year High Court battle. He succeeded in having the claim withdrawn but the much of the detail should be disturbing for company directors and highlights how ill-prepared most are to face personal claims arising from their business lives.
- What would you do if a claim was made against you personally with respect to the work you do as a director?
- Where could such a claim come from and what protection would you have under your existing employment contract?
- Would your company and fellow directors stand behind you and how would such a claim affect you, your family and your assets?
Where could a claim come from?
Directors have an increasing number of duties and obligations for which they are personally responsible, a lot of which carry unlimited personal liability. Liability can be incurred not only as a result of your own actions but also the activities of fellow directors and employees. I have often heard the phrase: “it can’t happen to me because I am smarter than that. I am good at what I do and I have good people and a fine profitable company”.
This is desperately naive and your vulnerability is illustrated by a cleverly crafted phrase in many statutes and precedents concerning directors’ wrongdoing, which states that either you did know about it or that, as a director, you ought to have known about it. Effectively you are hung whether or not you had knowledge or involvement in the wrongdoing.
A claim can be made not only with the main objective to recover compensation for loss allegedly suffered, but also to apportion fault and blame in order to deflect criticism and absolve others from responsibility. We live in a blame culture and those parties involved in a bad commercial situation may seek to deflect criticism from themselves by blaming others.
Make no mistake: when a serious claim is made, you are on your own. There can be many potential sources of a claim against you but the majority of civil claims are from banks, shareholders, insolvency practitioners, employees or competitors. Meanwhile, regulatory investigations and criminal proceedings arise from government agencies for breach of corporate law duties, a myriad of regulations, health and safety infringements, environmental crimes or even corporate manslaughter.
How would a claimant proceed?
An event can unfold slowly or it can be sudden. For me it was sudden. I owned a global plastics distributor to the food industry with operations mainly in Europe and North America. We were a successful company. In a twelve year period we consistently increased sales, profits and assets to achieve peak sales of over $100 million.
But an unexplained drop in assets, appearing suddenly in monthly management accounts, resulted in the company being put into administration. Only five weeks later, I personally received a civil law suit alleging misrepresentation and breach of directors’ duties and seeking multi-million pound damages.
“Dealing with a personal claim has an immediate and substantial impact on family”
Civil claimants have to decide that you have a case to answer and then assemble evidence to support their claim. They may have the power to interview you and other employees or colleagues. They will determine what would be the probable financial benefit in pursuing their claim and will take advice from counsel on the likelihood of success. Claimants play to win and will normally have been advised by their lawyers to use every available legitimate line of attack in order to quickly overwhelm you and achieve an early victory.
A side effect of attacking several directors personally can be to divide opposition. The law permits claimants to apply without notice, and even without yet having commenced proceedings, for draconian search orders and asset freezing injunctions in order to secure evidence and preserve your assets for the settlement of any judgement that might be made in their favour later.
When the black Range Rovers arrive
What all this means in reality is that you can open your front door at 8am one cold winter morning to be confronted by a pack of lawyers, technicians and security staff armed with
search orders and freezing injunctions. Range Rovers fill the street, neighbours enquire about your wellbeing, but you are not allowed to talk to them. Life immediately changes for you and your family. From owning a hugely successful $100 million business, suddenly your company has gone and you now face a bleak fight for survival with no income.
“You can open your front door at 8am one cold winter morning to be confronted by a pack of lawyers, technicians and security staff armed with search orders and freezing injunctions”
So there you are. A disaster has happened, you are on your own and no colleague will speak to you. You are banned from your office. Former employees have given affidavits against you. You are under injunctions from the High Court. Your assets have been frozen and your home searched. You need help.
Then it dawns on you that your directors’ liability insurance is a company policy and controlled by your company, or your ex-company. What’s more, your former colleagues are trying to claim on the same policy with the same insurer and probably all with different stories. You begin to worry about how to make a claim and the overall indemnity limits.
Funding is the key issue
Whether a claim has already progressed to legal proceedings or is still in the pre-litigation investigatory stage, the key issue to be faced by a director is that of defence funding. No effective defence can be mounted without this. A full and effective indemnity from your company, even when supported by a directors and officers liability policy, is often not enough. They can contain too many exclusions and can be subject to delays, while the defence lawyers may be billing on a monthly basis. Any advisors you need will immediately require either concrete guarantees of payment or cash deposits.
It is essential to maintain your own separate personal liability back-up plan, so that advisors are guaranteed to be paid and there will be no delays in mounting a vigorous defence. This is particularly relevant where time is an issue such as meeting a return date deadline at a Court, or in pre-litigation investigations by a potential claimant or a regulatory authority.
The conduct of the defence
Despite an overall competence in commercial legal matters, I had to learn quickly about the civil claims legal process and work through substantial difficulties to deliver an effective defence. I discovered deficiencies, substantial delays and unexpected exclusions in the insurance cover I had. There were areas of critical importance to the defence that were unexpected and unplanned for. Separate legal matters arose that needed funding. Choosing advisers was in itself a very difficult call. Above all I learnt that I was the one who possessed the detailed knowledge about my business and that I was in the best position to answer the allegations. It was up to me to be my own best advocate, often involving helping to draft detailed documents almost every day in nearly two years of dispute. This was an all-consuming process which only ended when all the allegations were withdrawn almost two years after the proceedings were begun.
The impact on family and personal life
Dealing with a personal claim has an immediate and substantial impact on family. Ranging from the practical implications of severe financial restrictions on items such as school fees, insurance, holidays and everyday living to the emotional strains of explaining to close family why these difficulties have occurred. I developed techniques to keep family life as normal as possible by taking holidays and keeping social engagements. It is a sad reality that some social contacts will not offer the support you need and will seek to distance themselves. I suppose this is to be expected, but others will probably surprise you with very substantial support.
Keeping business alive
During the two years I was engaged in the legal process I fought to maintain business and an income by relaunching my plastics distribution business. I was greatly encouraged that previous suppliers and customers welcomed this new start and were extremely supportive.
Later I asked why they had behaved in this way and was invariably told it was because of the previous 12 years of good service and sound relationships. So my first advice to anyone is to make sure you always work with excellence and fairness in all you do. You never know when you will need the reputation.
What you can do to manage risks
Throughout my case I came upon issues time and again where I wished I had previously taken different choices in my business structures and insurances. I discovered that there were some risks totally uninsured with apparently no available policies to meet these risks. As a result I formed Directors Premier Services to provide the additional cover directors actually need personally, and to provide answers to some of the difficulties I faced, such as;
- How to get the help you need, and from whom
- How to persuade lawyers and advisers they will be paid
- How to fund the uninsured parts of your defence
- How to survive under an asset freezing injunction
- How to deal with adverse PR and keep business relationships alive
- How to deal with the costs of defence abroad, particularly the USA
With some slight reorganisation of your business and personal life and modest extra cost, your affairs can be put on a much more robust footing to resist legal challenges. I engage with many boards in half day seminars to assess personal risk and set up solutions for individual directors.
I am very fortunate to have come through my legal challenge with an enhanced business and, I trust, reputation. Without the ability to mount an effective defence and ensure that justice was done, it could easily have gone the other way.
Today I continue to run my global plastics distribution business and I am non-executive chairman of an infrastructure development company. Directors Premier Services is my mission for justice for directors. I am keen to change the law, to end secrecy for insolvency practitioners and to make sure that those who apply for freezing injunctions and search orders themselves, face paying substantial damages and not just legal costs if they are proved to have proceeded unreasonably or without proper justification.