Apr 24

Becoming a non-executive director – the risk free option?

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 7 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths. The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors. It is not a substitute for taking specific legal advice on a particular set of circumstances.

7. Becoming a non-executive director – the risk free option?

In practical terms, a non-executive director is different from an executive director.

An executive director is ordinarily engaged on a day-to-day basis with the effective running of the company.  You may have particular responsibility for a specific area such as finance, sales, operations or marketing.  By way of contrast, a non-executive director may have no day-to-day role and instead adopt more of an advisory role, perhaps providing advice and help on discrete business planning issues from time to time.

It would be wrong to conclude that since you are only a non-executive director you have little or no responsibility. There is in fact little legal distinction between a non-executive director and an executive director.  As a result, if things go wrong, the non-executive director is ordinarily just as liable for any mismanagement of the company since he or she still has an obligation to ensure that the company is run in compliance with its regulatory and statutory obligations.

So how do you avoid risk and possible claims against you personally?

Five possible examples may help:

• Do your due diligence before you accept the position – is this a company which is being run appropriately and which you want to be associated with?
• Attend board meetings and make sure that issues and decisions are properly recorded in the minutes – if the meetings are not happening, make sure they are arranged.
• Keep a watching brief on the finances and regulatory compliance of the company.
• Do not feel shy at requesting information about the business so you can feel comfortable that the company is being run properly.
• Investigate the availability of insurance to cover you from possible personal liability.

A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

1. You have been appointed – but what kind of director are you?
2. The top 5 things directors do wrong – including the consequences
3. The Board of Directors cannot agree anything
4. Shareholders – the director’s ultimate master
5. Directors’ loan accounts – the best overdraft you can get?
6. Personal liability – so much for limited liability
7. Becoming a non-executive director – the risk free option?
8. Wrongful trading – the risks facing directors when the company is insolvent
9. The wound-up company – it’s not all over yet for directors
10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide. Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666. Raworths is based in Harrogate, North Yorkshire.

Published on 18 April 2024