Some aspects of the liability of non-executive directors in Malta

In recent years, it is becoming more common for companies having a certain stature to appoint nonexecutive directors on their boards.

Non-executive directors are not involved in the day-to-day management of the company and do not dedicate their full time to managing its affairs. In fact, they would usually assume an advisory and supervisory role. On paper, the addition of non-executive directors is a salutary measure intended to bring a valuable skill-set to the table. Reality might however be different, and it remains to be seen whether companies (especially non-listed companies) fully exploit the knowledge and experience which non-executive directors usually have.

Whatever value they bring to companies, non-executive directors need to be sensitive and fully appreciate the extent of the liability to which they might be exposed. Many nonexecutive directors would think that they are subject to less onerous duties than executive directors. However, this is a mistaken approach. In fact, the law does not make any distinction between executive and non-executive directors (although the articles of association would typically make reference to the distinction between the two). Thus, a company may have different directors responsible for different matters - finance directors, legal directors, managing directors, technical directors etc – yet in the eyes of the law all of them are equally responsible to maintain the company in good order in accordance with the requirements of the Companies Act.

Over the years, Maltese courts have had ample opportunity to pronounce themselves over the kind of liability that the office of a non-executive director attracts. Whenever they are sued for breach of duty or for failure to comply with any provision of the Companies Act, non-executive directors tend to argue that their role did not permit them to be fully aware of what was happening within the company. Unsurprisingly, this line of defence has rarely succeeded in exculpating the offending non-executive director. In fact, a fairly consistent line of judgments (most prominent among which is one dealing with the ‘Price Club’ saga) has held that it is difficult for a non-executive director to argue that he was not a party to the carrying on of the business of the company. This is so because one of the duties of directors (whether executive or non-executive) generally is to actually participate in the running of the business of the company.

One of the ways in which nonexecutive directors can limit their exposure to liability is by actually ensuring that they are up to speed with what the company is doing. While certain administrative shortcomings carry a monetary penalty, other breaches are more serious and might even entail imprisonment. There is therefore no harm – and it is actually good practice – in asking difficult questions to the executive directors, and especially the managing director. In some cases, it might not be enough to rely on the replies of the executive directors – in such cases it would therefore be recommended that nonexecutive directors actually check out for themselves that the company is abiding by certain obligations.

If non-executive directors realise that the company is not in line with any of its legal requirements, then they should make their views known to the rest of the board, an ensure that their views are properly reflected in the minute-books. Well-motivated dissenting opinions might come in useful at a later stage when a nonexecutive director is trying to prove in a court of law that he did all that was reasonable for him to do to prevent the company from taking a certain course of action. If a nonexecutive director’s opinion is routinely ignored, or where the matter revolves around a matter of fundamental importance, a director might even have to consider resigning his role. A properly-motivated resignation letter would be indicated in such case.

At this stage in the development of our company law, it would be pertinent to ask whether the state of affairs just described is actually preventing persons who are extremely competent in certain technical areas from contributing on the boards of companies by acting as non-executive directors. A number of such professionals are clearly apprehensive of the prospect of contracting liability on matters which are in practice out of their control. Considering the size of Malta and its pool of human resources, is it the time for the legislator to introduce a lighter liability regime for nonexecutive directors? It is submitted that this would be a step in the right direction and would in general lead to much better corporate governance across the board.

Dr Anton John Mifsud, Head of Legal at E&S Group.

E&S Group is a boutique, multidisciplinary practice that provides a wide array of services to an international client base. As a multidisciplinary group our pro-active team of practitioners, financial advisors, accountants, partners and independent associates are available to assist, advise and deliver to any aspects of our clients’ operations. Contact E&S Group on +356 20103020 or via email at info@ellulschranz.com.