Freshfields lobby clients to join campaign for capping of directors' liability

They are hoping to use a recent consultation paper from the Department of Trade and Industry (DTI) on auditors' and directors' liability as an opportunity to persuade ministers to introduce amendments to the 1985 Companies Act.

The government last year decided to postpone a reform of company law in response to the Enron and Worldcom failures. However, it pressed ahead with the Companies (Audit, Investigations and Community Enterprises) Bill which set out provisions for further regulation of accountants. At the same time, the DTI launched a consultation paper on directors' and auditors' liabilities.

"Section 310 of the Companies Act effectively prohibits any provision in a contract with a company or in the company's articles of association from exempting a director or a person employed as auditor, against liability which attached because they were negligent or in breach of a duty," explains David Coleman, a corporate lawyer at Macfarlanes. "It is designed to protect the company. If the director has done a wrong to the company, it would seem strange that the company could indemnify his actions." The DTI paper has raised the prospect of that ban being relaxed.

"We are proposing some concerted action by our clients," Freshfields said in a letter which was sent out to their clients last week. "Our strongly held view is that section 310 should be amended and we are willing to make a submission setting out detailed recommendations to the DTI for change." The firm believes that a change is necessary to encourage the best directors to join companies' boards at a time when many are becoming increasingly reluctant to do so.

David Coleman notes that the prohibition has become regarded as "unduly restrictive" and a possible relaxation was flagged in the Higgs Report on the role and effectiveness of non-executive directors. "However one of the DTI's proposals is something much wider and that is to allow companies in certain circumstances not to be restricted in what they can indemnify their directors for," he adds.