Directors Duties – ten points for best practice

Since 1990 there have been no less than five government reviews of directors and their responsibilities. Finally we have a white paper designed to codify the duties of directors which are currently spread out over numerous statutes and case decisions making it difficult for directors to know when they may have breached their duties to the company. It is not expected to come into force for a few years but is vital for directors to remain vigilant and continue to be aware of the duties that are contained in the legislation and case law to date. It is the same regardless of the size of your company. However big or small your company is, if you are a director you must ensure you comply with the duties required of you. Ignorance and 20/20 hindsight is no defence and the consequences are severe. The corporate team at Lemon and Co have vast experience in helping you out if you require advice on your duties as a director in any specific situation.

The duties also extend to de facto directors (those who act as directors although they have not been formally registered as a director at companies house) and shadow directors (those who are not appointed directors but whose decisions the company follows).

It is particularly important also when starting a new business and considering which trading medium to use to consider the duties which are placed on directors. It may be the case that limited liability is not going to be the most effective vehicle for your business and we can advise you on all the issues you should consider when setting up a company or partnership.

It is also important, particularly in small companies, to ensure that any family members who are appointed directors to make up numbers are aware that they cannot simply sit back and have no involvement in the company. There is much more to being a director of a company than being registered at Companies House. It is reasonable to split the workload of directors based on the talents of the individuals but all directors are jointly responsible for the company and the duties towards it. There is no defence to state “I did not know my co-director was acting in bad faith”.

Sometimes, it is difficult to distinguish between the individual running and/or owning the business and the company. However, the company must strictly be seen as a distinct entity as it is a legal entity separate from the directors and shareholders. You cannot ignore the duties of a director on the basis that there is no one else to call into question your actions. Remember if you are appointing directors with specific expertise such as an accountant as finance director they are expected to use their professional skills in the best interests of the company.

As a director you have no hiding place, you must act in the best interests of the company at all times.

Here's a checklist of some of the duties a director owes to a company. It is not a comprehensive list but serves as a guide for best practice. Of course if you wish to ask specific questions we will be happy to answer them (we strongly suggest asking before any trouble occurs) or come and see you to discuss directors duties and other issues in the context of your business. We can also assist you in the setting up of your company and the running of your company together with advice on finance, shareholders and employees.

The main point to remember is to treat the company as a completely separate entity to you as director. A company has its own rights and can take its own actions against you and others.

Act in the best interests of the company and in good faith at all times. For example consider whether a deal with a company you also own will be the best deal for the company. At the time a decision is made are you acting in good faith and solely for the benefit of the company taking all the circumstances into account?
Check you are using the powers conferred on you by the company's Articles of Association for their proper purpose and that the company does not exceed what it is allowed to do in its Memorandum.
Ensure that if there is a conflict of interest between you personally and the company that the company always wins. The way to avoid there being an issue over conflict is to disclose fully to the board of directors your interest so that the company (acting through its directors) can make a decision with all the facts in front of them. Disclose all interests in relation to transactions or shares held.
Refrain from dealing in your own interests rather than the company's when dealing with company business and property. If a director diverts work away from the company for his own benefit thereby making a secret profit which is not disclosed (and so authorised by the board) he will have to account for all of it to the company even if the company benefits as well.
Exercise skill and care as a director generally and in your particular area of management. Go to as many board meetings as you can and make sure you know at all times what is happening. Ignorance is no defence and as a director you will be jointly liable for any mistakes made.
Remember your contractual duties under your employment contract. Beware of your rights and responsibilities as both an employee and a director. Paul Archer, who is head of our employment team will be happy to advise you further on this area.
Do not accept loans or the benefit of guarantees from the company. Obtain shareholder approval when it is required for actions taken. Know your rights as a director and/or shareholder in relation to the calling of meetings, voting etc
Keep up to date with all the record keeping and administrative requirements set out in the Companies Act
If you think that the company may not have enough money to cover its debts obtain advice straight away. Do not wait as it could affect your personal liability.
Keep on top of the duties of directors in relation to specific areas applicable to your business such as health and safety, taxation etc

Keep this checklist of some of the duties of a director in mind as a guide to best practice. It is not a comprehensive list and the law continues to develop as each new case is heard so please call us if you need further assistance or advice and we will be happy to help.

Lemon & Co Solicitors

This article gives a general view and cannot be relied upon in any particular case. The need for specific legal advise must always be considered. For further information, please contact our Commercial Department or alternatively, please visit our website at www.lemon-co.co.uk for articles on other legal issues.

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				<p><strong><a href="http://www.lemon-co.co.uk/article_directors-duties.php">Directors Duties – ten              points for best practice</a></strong><br />
				Since 1990 there have been no less than five government reviews of directors and their responsibilities. Finally we have a white paper designed to codify the duties of directors which are currently spread out over numerous statutes and case decisions making it difficult for directors to know when they may have breached their duties to the company...</p>

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