Out-Law / Your Daily Need-To-Know

Liability for the directors' report

Out-Law Guide | 04 Jul 2007 | 9:57 am | 1 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is worth looking at three areas where there is a mix of civil and criminal liability for what goes into a number o...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

It is worth looking 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. (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

There is also liability for the financial information in a company’s annual and half-year results and in the interim management statements that provide a quarterly update. This derives from the EU’s Transparency Directive and applies only to listed companies in the United Kingdom (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; 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.

Directors are also under an obligation 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 separately ask themselves whether they believe the accounts are ‘true and fair’.