Directors Duties

19 September 2018

As business specialist lawyers we deal with many directors from a wide range of businesses on a daily basis.

We, at Acumen Business Law, have comprehensive experience and a thorough understanding of the obligations which directors are faced with on a daily basis. We are able to offer advice to directors both in respect of the day to day decisions which directors face and the duties which affect these decisions but also where proceedings have been initiated against a company or a director in their personal capacity. As a result of our dealings with directors of all sizes of business we are asked a number of different questions in respect of the role itself. Here is a breakdown of some of the most frequently asked questions:

1. What is a director?

A director is an individual appointed to lead the management of a company. The director or board of directors are responsible for ensuring the company is compliant with all of its obligations, such as those implied by statute, on behalf of the shareholders.

A single director can be responsible for the entire business however where the business grows and expands it may be necessary, or essential, to delegate roles and sectors of the business to specific directors. It may be that there are individual directors appointed in respect of the company’s sales, finance, marketing or human resources among other sectors. Where this is the case they will each report on and participate in board meetings to ensure that each area is complying with its obligation.

2. Who qualifies to be a director?

The general rule is that anyone over the age of 16 can become a director of a company and there are no additional qualifications, courses or skills needed to become a director. As well as natural persons it is also currently possible for a corporate entity, such as a limited liability company, to be a director of another company, however this can only currently be achieved where there is one natural person acting as a director.

People that are excluded from acting as a director are those who are bankrupt, who would require court permission, those who have been disqualified from acting as a director and those who are conflicted, such as the company auditors.

3. Who are my duties owed to?

When the Companies Act 2006 was introduced one of the large changes it brought was that it changed the duties from being owed to the shareholders to being owed to the company itself.

4. What are my duties as a director?

The Companies Act 2006 took the step of putting the existing common law rules and equitable principles into statute and, in doing so, made some minor amendments to their interpretation and application.

A. Duty to act within powers

The first, and perhaps the most important, is that a director must only act in accordance with the powers which they have been granted by the company. These duties can be found in the company’s constitution which is found in the articles of association of the company. As well as this the powers which a director is granted should only be utilised for the purpose which they were conferred.

The powers granted will largely be dependant upon the individual company’s articles. Should you require assistance in interpreting your powers then feel free to contact us on 01273 447 065.

B. Duty to promote the success of the company

As well as only exerting powers which are conferred in the constitution, it is vital for a director to apply these duties, as well as the other actions of the director, in a way which is to promote the success of the company. Whether a director is promoting the success of the company is one which is judged subjectively. The starting point is to look at the director and judge whether they have acted in good faith and in a way which they genuinely believed to be promoting the success of the business. As far as directors go, they would be mindful to put into writing the thought process involved in decisions, especially important decisions. When carrying out an analysis prior to making a decision consideration should be given to:
i. The long term consequences of the decision;
ii. The employees’ interests;
iii. The impact on relationships with suppliers, customers and other third parties;
iv. The company’s obligations to the community and environment;
v. The impact upon the company’s reputation; and
vi. The need to act fairly to all of the shareholders of the company.
Recording this process in writing will avoid any doubt as to whether the director could be in breach of this duty.

C. Duty to exercise independent judgment

As part of promoting the success of the business, a director is also obliged to exercise independent judgment on matters. This means that, where a decision is being made, the decision should be what the individual director believes to be the correct one and not a judgment determined by third parties, made for any of the directors’ own personal gain.

Where a director is silent, but believes a decision being made by fellow director to be against the success of the company or illegal in any way, then this silence will not protect this director in regards to their own duties.

In recent years, most notably in the Lexi Holdings v Luqman case, two non-executive directors (‘NEDs’) were found to be liable for their inactivity and failure to question their fellow director who was engaging in fraudulent practice. It is therefore vital that where you disagree with a fellow director who may be contravening the company’s constitution, the business’ long term success or the law, that this concern or disagreement is voiced to protect both your own position as well as that of the company.

D. Duty to exercise reasonable care, skill and diligence

Whilst there are no specific qualifications required of a director, the duty to exercise reasonable care, skill and diligence acts to ensure that the directors across the UK are acting in a way expected of the position. Historically the standard expected was exceptionally low, however case law and statute have expanded upon the standard expected.

This duty is firstly assessed objectively based upon the standards which would be expected of the ordinary director. This is the minimum standard set and is evaluated on a case by case basis dependant upon how the court deems a reasonable director would have dealt with the same decision in the same circumstances.

As well as the objective test being applied to the director, the court will also apply a subjective test which is based on the specific skill level, knowledge and experience of the director in question. Where, for example, the director has 30 years experience acting as a director for a large business, the court would expect and will hold the specific director to a higher standard of care than another who has just one year in a director role.

Where specific tasks are delegated, the director does not exclude themselves from the risk of being in breach of their duty of skill and care. The court has shown the duty extends to monitoring and supervision; a failure to adequately monitor or supervise a delegated task could lead to a director being in breach of their duty.

E. Duty to avoid a conflict of interest and not to make a profit

This duty aims to discourage directors from making decisions which benefit themselves personally rather than the company. This duty, unlike the above mentioned duties, extends beyond their appointment as a director and therefore even applies to former directors.

The large change which came as a consequence of the Companies Act 2006 was that it created situations in which a director can continue to act where there is a conflict, as well as continue to make a profit. Prior to the Act, this could only be done where shareholder approval had been obtained. However, it can now be authorised by an independent director. Of course that director would only be capable of approving such a profit or conflict where such an approval would not put them in a breach of their own duties (i.e. to promote the success of the business).

The most common example of where a conflict may arise is where you hold the position of director across numerous companies and these companies interact directly or indirectly; such as supplier, competitor or client. Where you may find yourself in this situation it is prudent to discuss with your fellow board members and seek approval, refer the matter to the shareholders or take legal advice as to how best to proceed. This is an area which we have advised upon on multiple occasions, helping directors to take the correct course of action where a potential conflict of interest occurs.

F. Duty not to accept benefits from third parties

This is linked to the duty to avoid a conflict of interest and is the further duty not to accept benefits from parties outside of the company for any decision, lack of decision or simply for being a director. You would only find yourself to be in breach of your duty where the benefit would likely give rise to a situation of conflict. Where you are unsure if you can accept a benefit then, as above, seeking legal advice as well as the approval from other directors is the best action to take.

G. Duty to disclose interests in proposed or existing transactions or arrangements

In line with the theme of avoiding conflicts of interest it is also possible that a director will have an interest in transactions which the company enters into; for example, where a contract is being entered into with a third party and the director has an interest in that third party.

Where a director does have such an interest, or may have an interest, they are under an obligation to inform the company as soon as reasonably practicable. Where informing the directors of the interest, an accurate representation of the nature and extent of the interest must be conveyed. There are circumstances where it does not have to be disclosed which are: where there is only one director of the company, the interest is not reasonably considered to give rise to a conflict of interest or where the other directors already know or ought to know of the interest. As well as this, a director is not expected to disclose when they are unaware of the transaction or arrangement or the interest itself. This is judged by whether a reasonable director should be aware and not the subjective knowledge of the individual director.

The rules are more stringent where the transaction which a director has an interest in is an existing one, for example, where the arrangement was in place prior to their appointment as director. The consequences are more severe for a breach of this and can entail criminal punishment alongside the exposure for liability to the company or shareholders.

Where a director has an interest in an existing transaction or arrangement then they must make a declaration in one of three ways. The first is at a formal board meeting, the second by notice in writing and lastly by general notice. Where carried out by notice it will need to be addressed at the next meeting between the directors in any case.

5. What responsibilities do directors have to hold meetings?

There are certain decisions which a director or board of directors make which require a meeting to approve the decision. Much of this is dependant upon the company’s constitution and the level of authority or powers which have been given to the directors.

It is vital when carrying out a meeting that the duties which are owed are complied with and are reflected in any agendas or minutes which record this. There is no requirement for a certain number of meetings to be held, however a sufficient amount need to take place to ensure that the duties owed by each director are fulfilled. At the very least, board meetings will have to occur for the approval of the companies annual accounts but should occur whenever any large or strategic decision is being contemplated.

Whilst there is no strict responsibility to hold board meetings, it is implied by the other duties which directors owe such as to the long term success of the company and the directors’ duty to act with reasonable care, skill and diligence.

6. What is the difference between a director and a non-executive director?

As opposed to a director, a non-executive director’s (NED) focus will be on the performance of the board itself rather than the general management of the company. They are not expected to make executive decisions but, rather, will be expected to contribute an independent and unbiased mind-set to meetings of the board.

Whilst the job role and focus of NEDs and executive directors are different, their duties and liabilities are largely the same. NEDs are expected to comply with the exact same director’s duties as executive directors. Failing which NEDs are exposed to the same liabilities that an executive director would be; such as both civil and criminal liability. As such it is vital that, where you are acting as a NED, you are still challenging, questioning and constructively contributing to board meetings and documenting the thought process behind these contributions.

7. What penalties and types of claims exist in respect of breaches of directors’ duties?

Where a director is in breach of the duties which they owe to the company they can be personally liable to the company for any losses which occurred as a result of their actions or inaction. Where a director acts beyond their powers and the company suffers a loss as result of this, the company will have a genuine claim against the director to recover this loss. This action would be initiated by the board of directors who will have to evaluate their own duties in pursuing any claim, whether that means it is in the company’s best interests to take legal action.

Where the directors do not bring a claim against a director, it may be than an individual shareholder or group of shareholders do take action. This claim, known as a derivative action, is where the shareholders bring a claim against a director who is in breach of their duties on behalf of the company to which they hold shares in.

As well as being liable to the company itself, a director can become personally liable for company debts where they allow an insolvent company to continue to trade. In this situation a liquidator of a company can start proceedings against a director for this wrongful trading. Further to this a director can find themselves in a situation where they are personally liable to HMRC, Companies House and creditors. As stated above, in respect of the duty to disclose an interest in a current transaction or arrangement, the liability that a director is exposed to can also include criminal fines.

It is evident from the above that whilst acting as a director usually accompanies the principle of limited liability, there are circumstances which arise where a director can become personally liable; such as insolvency situations and where a breach of their duties has occurred. Where a claim has been made against you in your personal capacity, as a result of your role as a director, is vitally important that you take steps to obtain legal advice from specialists at the earliest possible stage. If you ever find yourself in a position where a personal claim against you has arisen then you should contact us on 01273 447 065 as soon as possible.

8. Can a director still be liable for their duties or company debts after their resignation or termination?

The general rule is that a director is not liable for actions of the company after they have ceased acting as a director of the company. The two exceptions of where duties extend beyond the period of directorship are the duty to avoid conflicts of interest and the duty not to accept benefits from third parties. Where a director exploits the knowledge gained from their time as a director of a company, such as in respect of property, then they can still be in breach of their duties.

However a director should be cautious of any contractual liability that they have incurred during their time as a director of a company. Where, for example, a loan has been acquired and a director has given a personal guarantee in respect of the loan, they will still be personally liable beyond their tenure as a director of the company. As such you should not be hasty in resigning from your role as director where this is the case, because you will be giving up your control of the company and leaving the fate of the personal guarantee to others. We have advised many directors and shareholders, who have sold their business or resigned from their role over the years. Should you be in a position where you are exiting a business and have given a personal guarantee you should contact us to discuss this so that you avoid the risk of having personally liable for the actions taken by your successors years after your departure.

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