As people are beginning to understand the seriousness of the Millennium Time-bomb (or the Year 2000 problem as it is known) and the extent of the damage that it could do, the spotlight is turning to directors. What liability could they have if it all goes wrong?

The reality of the situation is that if the damage is great enough a party looking for someone to sue will cast a very wide net. A prudent director will take steps NOW to reduce the chance that he/she will be included.

What is the Year 2000 Problem?

Many computer programs, from those large enough to run production lines to those small enough to control a kettle, have allocated only two digits for storing the year part of any date. This has resulted in 1999 being stored as "99", for example.

With the arrival of the Year 2000 the program will only see "00" and may take it to be 1900, 2000 or fail altogether. There are a number of other dates that have been identified as problematic, for example, 9th September, 1999, as "9999" has been used as a shut-down code in some programs. Programs may also not recognise the Year 2000 as a leap year and hence the 29th February, 2000, 1st March, 2000, 31st December, 2000 and 1st January, 2001 may cause difficulties. There are other such dates and the list is continually getting longer.

The Year 2000 problem will either be the biggest over hyped non-event since the flat earth theory or one of the most wide spread problems to affect society. Unfortunately all indications suggest that the latter will be closer to the truth.

How will the Year 2000 problem affect companies?

The Year 2000 problem will affect all companies in some form or another. The degree of the problem will depend on the level of preparatory work undertaken by each company.

The Year 2000 problem could affect:-

  • the company’s internal systems, including sales order systems, purchasing systems, accounting systems, right down to individual PC’s;
  • the company’s ability to carry on electronic commerce;
  • the company’s telecommunications ability;
  • the company’s ability to fulfil orders, particularly if its own suppliers and/or service providers are affected;
  • the company’s ability to transfer and receive funds, particularly if its bank’s systems are affected;
  • the company’s amenities such as heating, air conditioning, lifts, alarm systems, lighting and internal communications.

The list is by no means exhaustive and those who do nothing about it may be left facing financial ruin before the end of the Year 2000.

Fine, so a problem exists but how does this affect directors?

  • Fiduciary Duty to the Company

    Directors owe a duty to the company of which they are directors to act in the best interests of the company. If they fail to do so then, depending on the circumstances, the company may have a right to sue them personally for the losses that it has suffered.

    Failing to ensure that adequate steps (or any steps at all!) have been taken to deal with the Year 2000 problem could be a clear breach of this duty. Given the amount of publicity that the Year 2000 problem has received, it would not be difficult for any plaintiff company to show that a defendant director knew, or ought to have known, of the Year 2000 problem and the potentially disastrous effects which it could have on the company.

  • Restrictions on acting as Directors

    In a worst case scenario, where a company goes into liquidation as a result of losses suffered wholly or in part due to Year 2000 problems experienced by it, its suppliers or even its customers, the liquidator would be obliged to bring an action under the Companies Acts to restrict the directors from acting as directors in the future. To avoid such an outcome each director would have to show that he/she had acted honestly and reasonably in all the circumstances. Any directors who fail to take appropriate steps will have a difficult task on their hands.

  • Duties owed to Shareholders and Employees

    It should also be noted that the directors are obliged to take into account the interests of shareholders and employees when making decisions. Failing to act in response to the challenges posed by Year 2000 problems could be a clear breach of this obligation.

    Of further note in respect of employees is the Safety, Health and Welfare at Work Act, 1989. This obliges employers to consider and address potential hazards in the work-place. The existence of any such hazard resulting from Year 2000 defects in plant or equipment, for example, could constitute an offence under the Act. Where such an offence is committed by a company with the consent or connivance of a director of the company that director could, in addition to the company, be guilty of the offence and liable to be prosecuted under the terms of the Act.

  • Reckless Trading

    A director who was knowingly a party to the carrying on of the business of a company in a reckless manner can be held to be personally liable for the debts of the company, without limitation. Where directors continue to carry on business where they are aware of serious Year 2000 problems that could have devastating effects on the company, this may constitute reckless trading and leave the individual directors seriously exposed.

  • Regulatory Authorities

    Various regulatory authorities, including the Central Bank of Ireland and the Irish Aviation Authority (to name but two) have issued detailed questionnaires to companies regulated by such bodies. Failure to adequately respond to such questionnaires may seriously impact on the ability of the company to continue doing business.

  • Information to Auditors

    Auditors have started to ask questions relating to a company’s readiness for the Year 2000 and the likely impact of any Year 2000 problems. Directors are obliged by company law to keep adequate records of the company’s business and to give all relevant information required by the auditors. In this regard it should be noted that a director commits an offence if he/she knowingly or recklessly makes a statement to an auditor that is misleading, false or deceptive.

  • Insurance Cover

    Directors should be aware that some insurance companies are not offering coverage in respect of claims resulting from the Year 2000 problem and some insurers are only offering a limited coverage in this area. This could potentially affect companies and directors themselves. In respect of companies, directors should ensure that all insurance policies taken out by the company are reviewed to ensure that the company is adequately covered. Advice should be sought from the company’s insurance brokers and legal advisers where necessary. In respect of directors and officers personal insurance policies, each director should confirm that their policy would adequately protect them for any claims made by the company, or third parties, against them for losses suffered as a result of an inadequate response to the Year 2000 problem.

What can be done?

There are a number of steps that should be given urgent consideration.

  1. Technical Audit.

    A full technical audit of all software and hardware should be carried out. This should include all assets which have embedded microchips and will go far beyond merely looking at desktop computers and software programs used in the business.

  2. Management Audit.

    This should involve a review of the company’s business to judge the likely impact of Year 2000 problems that may be experienced by it and, possibly more importantly, by its suppliers, third party agents (such as banks) and even customers. This will give a clearer indication of the extent of the problem and may lead to the replacing of suppliers and service providers who cannot guarantee continued levels of goods and services into the Year 2000 and beyond.

  3. Contractual Audit.

    It is very important to understand what contractual liabilities the company already has that may be brought into play by Year 2000 problems. It is equally important to assess, as soon as possible, what rights the company may have against third party suppliers so as to ensure that preventative action is taken now. The contractual audit should also include an analysis as to what warranties should be sought/given in any contracts entered into in the future with third party suppliers, service providers and customers.

  4. Designation of Resources.

    It will be important to show, in the future, that adequate funds (and if necessary staff) were allocated to the Year 2000 project. Directors should continually monitor the situation to ensure that matters are being properly dealt with. Merely adding to the work load and budgetary problems of the company’s IT department would not be considered an appropriate response to the Year 2000 problem. The director should also ensure that the people involved in resolving the Year 2000 issues have access to all relevant information and personnel.

  5. Keeping Detailed Records.

    Directors should keep a detailed record of steps taken so as to assist in any defence that they may have to mount in the future that they did take all reasonably steps in a timely fashion. If individual directors find that their recommendations in relation to Year 2000 are not being implemented then they should insist that such recommendations, and the refusal to act upon them, are minuted. If the problem is serious enough a individual director may have to consider his/her position on the board.

Conclusion

The Year 2000 problem is real and any director who dismisses it as insignificant may end up with all the wrong reasons for remembering the turn of the millennium.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.