Directors' liability for the directors' report
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
It is worth looking in a little more detail at three areas where
there is a mix of civil and criminal liability for what goes into a
number of the reports directors are obliged to produce.
False or misleading statement in directors’ reports
A director will be liable for any false or misleading statement
in the annual directors’ report and the directors’ remuneration
report or if they omit something from the reports that should have
been included. But the director must have known the statement was
wrong, or been reckless about it, or have been dishonest about
leaving out the required information. This liability came into
force under the Companies Act 2006 on January 20, 2007.
(Recklessness requires a conscious disregard as to whether the
information was right or wrong.)
Even if knowledge or recklessness can be proved, the director’s
liability is only to the company, not to any outside investor; and
the company has to show that it has suffered a loss as a
result.
False or misleading statement in periodic financial
information
Since November 8, 2006, there has also been a liability for the
financial information in a company’s annual and half year results
and in the new interim management statements that provide a
quarterly update. This derives from the EU’s Transparency Directive
and applies only to listed companies in the UK (not those on AIM or
PLUS).
But this is not a personal liability for a director. If an
investor acquires shares in a listed company and later incurs a
loss because of something untrue or misleading in the company’s
results, or because of the omission of a material fact, it is the
company that will have to pay compensation. And the liability only
crystallises if a director knew that the information was untrue or
misleading, or was reckless on the point, or they left out the
required information with the intention to deceive.
So dishonesty or recklessness is needed on the part of a
director, and honest mistakes should be excused.
Audit reports
It is a criminal offence for a director or company employee to
give the auditors false or misleading information, or to fail to
give them information they have asked for without delay. The first
offence can lead to a two-year prison term; the second risks only a
fine.
The Companies Act 2006 imposes a new obligation (effective April
2008) on directors: not to approve the company’s accounts unless
they are satisfied that they give a true and fair view of the
financial position. In other words, they must not accept the
opinion of the auditors automatically. They must formally ask
themselves whether they agree that the accounts are “true and
fair”.
