Could directors be liable for failing to prepare for Brexit?

Usually where somebody causes a company loss, the directors will authorise the company to start proceedings to recover that loss. However, where that loss is caused by the directors, it is unlikely they will authorise legal action against themselves. Instead, the shareholders or investors can bring a derivative claim against the directors on behalf of the company and exercise its legal rights where the director refuses to do so.

How are these claims brought?

To bring a derivate claim, the individual must get permission from the court once they have assessed the claim’s merit. The court will consider a number of factors, including:

• whether it is in the best interest of the company to pursue the matter, or if the shareholder has their own agenda, and
• whether a director acting in accordance with their duty to promote the success of the company would pursue the claim.

How does Brexit affect this?

Preparations for Brexit are likely to be made at a senior level and be subject to a risk management process. Where a director’s behaviour is restricted by internal governance, and decisions are made by multiple people, evidencing that a director acted outside of their duty can be difficult.

Additionally, the consequences of Brexit are naturally hard to predict. Unless a company does nothing at all to prepare and protect the business, claims based on mismanagement will need to address how the directors have acted more inappropriately than the Government and other companies struggling to deal with Brexit’s unclear consequences.

While Brexit is one example of where the potential exposure to a claim might manifest itself, the threshold for proving these claims is high and arguing mismanagement could be challenging where there is no precedent for best practice.

However, if a claim made over Brexit related risk is found to be valid, then the directors’ insurance policy could also be invalid. In this situation, the directors would face a claim for which they are not indemnified against.