The key principles of director and auditor liability are not set out in legislation. Instead they have to be derived from a series of court judgements. Parliament has however legislated to deal with particular abuses, including in the Companies Act 1929, which restricted the ways in which directors and auditors can limit their liability. These provisions can now be found in the Companies Act 1985.
Developments in the last 70 years may mean these provisions are no longer appropriate, or are inadequate. There are growing concerns that the law does little to recognise that directors may face legal action for breach of duty (especially the duty of care and skill) even when they have acted in good faith and in the belief that their decisions were in the best interests of the company.
Furthermore, auditors are, under current law, exposed to unlimited liability for their mistakes. They are also concerned about the availability and cost of insurance, including self-insurance. The Government is determined to ensure that a competitive and high-quality market for audit services is maintained, and that shareholders have access to high-quality and reliable information, whilst maintaining an adequate system of redress.
Some investors have also proposed changes, including enhancing the scope of the audit and the audit report.
This consultation exercise builds upon the work of the Company Law Review (“CLR”) and of the subsequent review of the role and effectiveness of non-executive directors undertaken by Derek Higgs.
