At the time of writing, there is much discussion as to the role of directors inthe corporate environment. The Hampel Committee on Corporate Governance and theGovernment GreenPaper on company law could lead to substantial changes in thefield of company law and alter the legal position of company directorssignificantly before 1 January 2000. However, at present, there is no specificY2K legislation in the context of directors’ duties or otherwise and thisarticle will therefore assess the applicability of existing principles andduties to theY2K situation.
Many companies will experience lesser or greater difficulties on account ofthe advent of the Y2K. As we will see in this chapter, directors may be liableto certain persons for resultant losses.
Before we plunge into a brief analysis of this topic, we would note theapparently invidious position of non-executive directors. In theY2K context,their responsibilities would seem to be twofold. First, they would appear toshare the liabilities and duties of executive directors, as discussed below.Secondly, they would seem obliged to monitor the fulfilment of those same dutiesby the executive directors in their endeavours (or lack of them) to achieve Y2Kcompliance.
Duty to Act in Good Faith in the Company’s Best Interests
Directors must act in what they in good faith consider to be the company’sbest interests. Whilst this test is fundamentally subjective, it is tempered byobjectivity to the extent that the actions or omissions of the director must bewithin the gamut of what a court detemines a reasonable director couldhave considered to be in the company’s interests. To fulfil this duty, it hasbeen established that, amongst other things, a director must avoid situationswhere he finds himself with a conflict of interest. Thus, for example, if acompany in need of Y2K software re-engineering were to engage a Y2K solutionprovider in which one or more of the directors had an interest, the potentialfor conflict would be clear.
Duty to Act with Care, Skill and Diligence
Traditionally, this has not been a particularly onerous duty. In generalterms, it was acceptable that a director delegated duties to appropriatepersons, that he only dedicated a limited amount of his time to the company’saffairs and that he acted in a manner consistent with what could be reasonablybe expected from someone with his level of knowledge and experience.
This duty has over the course of time been evolving into a more onerous andobjective one. It would seem that a director is now obliged to acquaint himselfmore fully with the company’s overall situation and that the subjective testapplied to his level of skill is tempered by an objective one in relation to thediligence which he exercises in relation to the company’s matters.
This duty is likely to prove very relevant to the Y2K scenario. It might beapplicable in many regards, including the steps taken in determining whom toappoint to fix Y2K bugs, the monitoring of employees entrusted withresponsibility for the company’s Y2K project and the establishment ofappropriate contingency plans should the millennium change adversely affect thecompany.
As the Y2K problem is essentially a technical one relating to the operationof software and hardware, it would seem very likely that the subjective skillcriterion will result in IT directors being more harshly assessed than theirless technically orientated brethren.
Directors in Dereliction of Duty
We shall now consider briefly what might happen to a director who fails toperform his duties adequately or at all. Before considering these, it is worthnoting that a director may be able to escape liability to thecompany/shareholders if he can convince a court that he has acted `reasonablyand honestly’ in all the circumstances.
Removal from Office
This is a power that the shareholders can exercise at a general meeting of acompany by way of ordinary resolution.
Before resorting to such a measure, the shareholders would have carefully toconsider whether such removal might give rise to claims for wrongful or unfairdismissal. Where the director is also an employee, the shareholders shouldensure that they follow the company’s disciplinary procedures and take intoaccount any relevant terms in a service contract.
Action for Breach of Duty of Good Faith or Duty of Care, Skill andDiligence
The shareholders can make the decision on behalf of the company to sue thedirectors for financial recompense for breach of their duties.
Action in Tort for Negligence
The fact that a director has been negligent in failing to address theY2Ksituation adequately does not necessarily mean that he is in breach of duty. Insuch circumstances, the only option of aggrieved shareholders might be to suethe director(s) in damages for negligence.
Disqualification
If a company enters liquidation as a result of Y2K-related problems whichhave been brought about by breach of duty by a director, then that directorcould face a disqualification order of between 2 and 15 years.
The culpability of the director will be relevant to whether and for how longsuch an order is made. If we plot a chart of the sorts of breaches likely toresult in such an order, we might find the intentional suppression ofinformation necessary for the company to become Y2K compliance at one end and anomission to provide the same information arising out of amnesia at the other.
Relief against the Consequences of Dereliction of Duty
Shareholder Ratification
The shareholders of a company have the power by a majority vote at a generalmeeting to ratify certain breaches of duty by a director. This power would notseem to be exercisable where the breach has involved dishonesty or illegality.
Insurance
Directors cannot be exempted from breach of duty by contractual provisions orthe terms of a company’s Articles of Association. However, many companies nowindemnify their directors in respect of civil liability by effecting `Directorsand Officers’ insurance policies to cover breaches of the sorts of duty we havediscussed above. Obviously, the question as to whether any particular policywould cover a breach of duty in the context of Y2K would depend on the wordingof the policy and the nature of the breach.
Corporate Manslaughter
Where the acts or omissions of a company are such as to cause the death of anindividual, the courts will look behind the corporate veil to see whether therelevant act or omission could properly be attributed to one or more individualsrunning the company. Obviously, the smaller the company, the more likely it isthat such identification will be possible.
At the time of writing, it is not possible to predict whether theY2Kwillreally lead to many or any deaths. However, it is clear that the effect oftheY2K on a whole host of mission critical software and embedded chip-containingmachinery could cause personal injury or even death.
Advice
Directors’ conduct in the late 1990s may well be scrutinised in retrospect.In many cases, directors will have had to make decisions on difficultY2K-related issues. These might include determining whether to persevere withsoftware which is not compliant on the basis of reassurances from the supplierthat it would make it compliant pre-2000. Directors will also have to decidewhat steps and expenses are to be incurred in the context of contingencyplanning to cover the potential failure of systems or suppliers fail at the turnof the century.
Directors who are conscious of their duties and justifiably fear the mantleof the scapegoat should endeavour to keep detailed records of the reasons fortheir decisions. Such a record may well enable them to demonstrate that thosedecisions were made in fulfilment not dereliction of their duties.
