Have you recently become, or are you considering becoming a director? A recent Court of Appeal case of Chean v De Alwis illustrates that you may not be protected from personal liability for actions the company has taken before your appointment.

In Chean v De Alwis, the Court of Appeal found that a director of a company was personally liable to repay investors money, even though she was not a director at the time securities were offered to the public without a registered prospectus, in breach of s 37 of the Securities Act 1993. In this case, the individuals who were liable to repay investors were those directors who held the office of director at the time liability attached to the directors under the Securities Act, not on the date on which the company made an offer of securities to the public in breach of the Securities Act. The Court accepted that the director could have escaped personal liability if she could have proven that the breach of the Securities Act was not due to any misconduct or negligence on her part.

What is the lesson to be learned?

You must do your due diligence on the company. If the company has raised any capital in the previous months, check how it was done. If securities were offered to the public, you should ask to see the legal advice confirming that the offer complied with the Securities Act. If there is no documentation, you should get your own advice. This could protect you against any later personal liability for breaches of the Securities Act, as you could show that you relied on external legal advice, and that the breach was otherwise not due to your misconduct or negligence.

Generally, ask to see the company records, in particular the Board minutes. You should check what recent transactions have been made or entered into by the company, such as dividend payments or major transactions under s 129 of the Companies Act. You should also check whether any losses have been suffered by the company and how solvent the company is. These checks will allow you to assess the financial state of the company, and the likelihood of a creditor or shareholder claim being made against the company, and possibly you personally, at a later date.

And now you are a director…?

It is not acceptable for directors to sit back and let others run the show. You must take an active interest in the corporate governance of the company, act in good faith and comply with your duties under the Companies Act 1993 and Securities Act. A director has a duty to be familiar with the ins and outs of the company, and be aware of the financial situation of the company, including reviewing monthly and annual financial reports, business plans and budgets. It is not enough for you to rely on the verbal assurances of those responsible for the day to day running of the company, you have a duty to make your own investigations based on the documentation available, although you can rely on documentation given to you by an employee of the company who you reasonably believe to be reliable and competent; or a professional advisor or expert on matters within their competent.