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Director negligence arises when a director fails to exercise the level of care, skill, and diligence reasonably expected of someone in their position, resulting in financial loss or damage to the company or others. The standard considers both objective benchmarks and the director’s individual expertise.
Claimants must prove:
The director owed a duty of care to the company or relevant parties.
The director breached that duty by acting below the expected standard of skill and diligence.
The breach caused financial loss or damage to the claimant.
The loss suffered is measurable and directly linked to the breach.
In English law, directors owe duties to the company, not typically to individual shareholders, employees, or creditors. This means:
If the company suffers loss due to a director’s negligence, only the company (usually via a derivative claim) can sue to recover that loss.
An individual (e.g. shareholder or employee) can only sue a director personally if:
The director owed a separate duty of care directly to them (which is rare), and
They suffered a personal loss that is not just a reflection of the company’s loss (known as the no reflective loss rule).
The Company: The company itself can bring claims directly or via derivative proceedings where shareholders enforce the company’s rights.
Shareholders: Shareholders may bring derivative claims on behalf of the company if the directors fail to act against negligence.
Creditors: When insolvency is looming or present, creditors may have standing to claim for negligence impacting their interests.
Third Parties: In rare cases, third parties relying on directors’ representations or decisions can bring claims, but this is limited and requires proximity.
Complex and Lengthy Proceedings - claims involve detailed financial records, expert reports, and complex corporate histories, meaning investigations and court cases can take years to resolve, increasing costs and uncertainty.
Evidential Burden - the claimant must provide clear evidence of breach, causation, and loss, often requiring expert forensic accountants and document-heavy disclosure, which can be difficult to obtain and interpret.
Difficulty Quantifying Loss - losses may include indirect damages, such as lost business opportunities or reputational harm, which are inherently harder to prove and value precisely, making damages claims challenging.
Procedural Hurdles - derivative claims require court permission and must demonstrate that litigation is in the company’s best interests, adding extra layers of complexity and possible delays.
Costs Risks - litigation can be expensive, and unsuccessful claimants may be liable for the defendant’s legal costs, potentially leading to significant financial exposure beyond damages sought.
Probate and Estate Issues - if the director is deceased or incapacitated, claims may result in caveats being lodged against the estate, delaying probate and estate administration, complicating resolution.
Reputational Risks - court cases or disputes with directors can damage the company’s reputation, affect shareholder confidence, and impact ongoing business relationships.
Honest Errors of Judgment - directors making reasonable, informed decisions—even if they turn out poorly—are generally protected by the “business judgment rule.”
Commercial Risk-Taking - directors are expected to take business risks; acting prudently in the interest of the company does not equate to negligence.
Differences of Opinion - disagreements among directors or with shareholders on company strategy do not amount to negligence unless duties are breached.
Lack of Perfection - minor mistakes or procedural errors without resulting loss are unlikely to be classified as negligence.
Reliance on Professional Advice - directors who act in good faith based on reasonable advice from lawyers, accountants, or auditors usually avoid liability.
Ignoring Insolvency Warnings - directors continuing to trade when the company was insolvent, worsening losses and exposing themselves to wrongful trading claims.
Failure to Monitor Staff - a director failing to supervise employees properly, which allowed fraud or mismanagement to occur unchecked.
Approving Risky Contracts - directors entering into substantial contracts without adequate due diligence, resulting in financial penalties or contract repudiation.
Disregarding Professional Advice - ignoring auditors’ or legal advisors’ warnings, leading to regulatory breaches or financial losses.
Breach of Fiduciary Duty - where directors act in self-interest or fail to act loyally towards the company.
Wrongful Trading Claims - in insolvency, claims against directors for continuing to trade recklessly.
Director fraud and Fraudulent Trading Claims - where directors knowingly engage in dishonest conduct.
Professional Negligence - if directors hold professional qualifications and their conduct falls below those standards.
Contractual and Misrepresentation Claims - where directors’ actions breach contracts or involve false statements causing loss.
If you need help assessing or managing director negligence claims, contact us. Early legal advice is crucial to mitigate risks and plan effective strategies.
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Director of Dispute Resolution
Meta started her legal career working on insolvency disputes, advising insolvency practitioners, directors and debtors facing claims from liquidators or trustees. She gained valuable experience in managing trading businesses whilst working for one of t...
