Directors of a company have day to day control and therefore perform a critical function in seeking to maximise value for shareholders and ensure that the company is properly and legally run.
Whilst shareholders can ultimately remove directors who are performing badly or unlawfully, this is often easier said than done, particularly, as with many companies, if one or more directors is also a shareholder.
Director duties have always been recognised in law but has now been given statutory clarity in the Companies Act 2006. However, as you will note from some of the main principles detailed below from the Act, the statutory guidelines still depend in some cases on good judgment being made by directors. There is still therefore considerable risk to directors in getting it wrong, which can include possible personal liability and at worst, being banned as a director or even criminal liability.
Consequently, it is quite common for directors to protect their interests, in a difficult situation, by seeking advice from solicitors, accountants, insolvency practitioners or other experts. Having a written opinion from these types of advisers which may support a particular decision offers some very useful protection. Even if the advice is not totally supportive of a course of action it will still possibly help as evidence that the director has taken the matter seriously.
The main director duties in the Companies Act
Duty to act within powers – as a Director, familiarise yourself and act within powers given to you in the company’s Articles of Association.
Duty to promote the success of the company – this is a difficult duty as it involves balancing duties to shareholders with the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company for having high standards of business conduct, acting fairly between members of the company and; subject to the legal requirements, to consider and act in the interests of creditors.
Duty to exercise independent judgment – to avoid with independence and personal integrity in good faith for the benefit of the company.
Duty to exercise reasonable skill and care and diligence – this duty is to use a level of skill and care consistent with a theoretical reasonably skilled director. This duty would include such things as ensuring that the company does not simply ignore laws such as Health & Safety, employment law, payment of taxes to give a few basic examples.
Duty to avoid conflicts of interest – as a Director you should, using your commonsense, be able to identify a potential conflict of interests between your personal interests and those of the company. the best policy will always be to disclose any such potential issues to the other directors so that the company can make an informed decision.
Duty not to accept benefits from third parties – you should not make a secret profit from any undisclosed and unauthorized transaction or divert work away from the company for your own benefit.
Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – disclose anything which may impact on the company.
If you are director facing a difficult decision and are unclear as to the best and/or legal way to proceed, we can assist. We can also assist if you are a shareholder and believe that a director or more than one are in breach of their director duties.
An initial discussion of up to 30 minutes is offered free, so get on touch.