January 06 2025

English Insolvency Service Drops Case Against Carillion Directors: What Does It Mean For Director Liability?

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The role and duties of company directors are well established in English law through the Companies Act and case law. These principles are widely applied in many jurisdictions, including the Bahamas, where UK cases about directors’ liability and related issues carry considerable weight.

In the Bahamas, directors of companies owe strict duties under company law. Their duties are set out in the Companies Act, requiring directors to act honestly, in good faith, and with the same care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances.

So far, so good. But not all directors are the same. What about the duties of non-executive directors (NEDs)? Don’t they have different responsibilities from executive directors?

Below, we examine the English Insolvency Service’s abrupt decision to discontinue disqualification proceedings against five former NEDs of the collapsed construction company, Carillion plc. What might this withdrawal mean for individuals acting as NEDs in the future?

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Executive Directors and Non-Executives – What’s the Difference?

The key difference is that executive directors are directly involved in managing the company, while NEDs tend to be external advisors, providing oversight and ensuring proper governance. NEDs may challenge Board decisions, provide guidance, and assist in developing the company’s strategic direction. They are often appointed for their specific skills, knowledge, or industry contacts.

Crucially, NEDs are independent and play a vital role in keeping the executive directors in check.

Carillion Disqualification Proceedings: What Happened?

Proceedings against the NEDs of Carillion arose after the construction conglomerate collapsed. Carillion had been a lynchpin of the UK construction sector. When it failed, there was a media and political outcry, with calls for the directors to be held accountable. Among the cases brought were disqualification proceedings in 2021 by the Insolvency Service against eight former directors, including five NEDs.

The Insolvency Service alleged that the NEDs had breached their duty to know the ‘true’ financial position of Carillion at all times. They had failed to recognize that executive directors were presenting a misleading picture of the company’s finances. Consequently, the NEDs were deemed unfit to manage any company. However, three days before the disqualification proceedings were due to start, the case was abruptly halted at the Insolvency Service’s request.

What Are the Duties of a Non-Executive Director?

Technically, NEDs are held to the same legal standard as executive directors: to ‘exercise reasonable care, skill, and diligence.’ This applies despite their less hands-on role in company management.

The Corporate Governance Code suggests NEDs should scrutinize management’s performance, ensure agreed goals and objectives are met, and verify the integrity of financial information.

The Institute of Directors acknowledges that while NEDs cannot give the same continuous attention to the business as executive directors, they must demonstrate the same commitment to the company’s success. NEDs are subject to the duties outlined in the Companies Act 2006, just like their executive counterparts.

Comment

The Insolvency Service proceedings against Carillion NEDs had been viewed with trepidation. Many feared that if the case succeeded, it would signal a fundamental shift in English company law regarding NED responsibilities and liabilities, introducing uncertainty over their role. The sudden withdrawal of proceedings has been widely welcomed. However, the brinkmanship displayed by the Insolvency Service suggests that similar proceedings against NEDs may not be far off.