Director Liability and the Role of the Internal Directive

What professional directors realise last is that liability does not stop at the company. Board members are liable for loss caused by a culpable breach of their duties under the law or the articles. That liability is personal and reaches their own assets.

The scope of liability

Liability does not arise only from bad decisions actively taken. Breach of the duty of oversight — failing to know what should have been known — can give rise to it too. Sitting on a board does not make "it was not my area" a sufficient answer on its own.

For that reason, leaving responsibilities undefined inside a company is not, as often assumed, protective for directors. It increases the risk.

The internal directive shifts the burden

The most concrete way to manage the risk is an internal directive on delegation of management.

Where the articles so permit, management may be delegated in whole or in part to one or more directors or to third parties by way of an internal directive.

Where it has been, the delegating members are not liable for loss arising from the delegated functions to the extent they show reasonable care in selecting those to whom management was delegated.

In practice: in a company without an internal directive, every board member has to answer for a loss when one occurs. In a company with one, responsibility is evidenced by a document and the argument narrows.

What an internal directive should contain

• Division of duties. Which functions are delegated to which unit or person.
• Limits of authority. Monetary limits, signing authority, and which transactions require board approval.
• Reporting. How often, and in what form, those with delegated authority report to the board.
• Oversight. How delegated areas are monitored.
• Review. How often the directive itself is revisited.

The last two are usually omitted. Yet a board that never monitors a delegated area may still be found to have breached its duty of oversight, internal directive or not. The directive does not remove liability; it defines it and places it with the right person.

Documenting decisions

Alongside the directive, how board decisions are taken matters:

• Recording, in the resolution or its annexes, the information and reports relied on,
• Minuting dissenting members' notes of dissent,
• Recording that members with a conflict of interest took no part in the discussion or the vote.

The note of dissent matters most: a member who does not have their disagreement minuted is treated as having taken the decision.

When to prepare it

An internal directive is not a document that can be prepared after a problem arises. One drafted retrospectively has no evidential value and becomes a dispute in itself.

The right moment is when the management structure is established, or when professional directors take office. If no such document exists in the current structure, there is nothing to wait for.

Conclusion

A seat on the board brings personal risk along with signing authority. That risk cannot be removed, but its boundaries can be drawn, responsibility can be evidenced, and decision-making can be made traceable. The internal directive is the instrument for doing so.