These articles gives a general overview only and the legal position at the time of writing them. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print.
Directors Duties – 10 points to remember
Over the years directors duties have been 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. Finally, in 2005 we had a white paper proposing to reform company law which included a proposal to codify director’s duties. Those proposals have now been made into law with the enactment of the Companies Act 2006. Part 10 of the 2006 Act sets out the laws relating to company directors and; Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on director’s.
The general duties of directors are based on and replace those previously decided and set by case law. However, the statutory duties are to be interpreted as before. The provisions of the Act extend to shadow directors (those who are not appointed directors but whose decisions the company follows) and de facto directors (those who act as directors although they have not been formally registered as a director at Companies House) in circumstances as before. They also apply to a person who ceases to be a director.
It is important that any director whether of a big or small company is familiar and complies with their duties. Ignorance is no defence and; the consequences can be severe both for the company and personally. As a director you have no hiding place, you must always act in the best interests of the company.
It is particularly important when starting a new business and considering which trading medium to use to consider the duties which are placed on directors. For example, in small companies where family members are appointed just to make up numbers, you must ensure that they 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 as will be seen below.
It is reasonable to split the workload of directors based on the talents of the individuals. However, all directors are jointly responsible for the company and the duties towards it. If you are appointing directors with specific expertise such as an accountant as finance director they are also expected to use their professional skills in the best interests of the company.
Sometimes, it is difficult to distinguish between the individual running and/or owning the business and the company. However, the company must be seen as a distinct entity separate from the directors and shareholders.
The corporate team at Lemon&Co has vast experience in advising directors of their duties in any specific situation. If you have any specific questions we will be happy to answer them (and strongly suggest that you ask before any trouble occurs) or come and see you to discuss director’s 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.
Here is a checklist of the main statutory duties on a director and other best practice points to be considered.
The main point to remember is to treat the company as a separate entity. It has its own rights and can take its own actions against you and others.
- Section 171 – Duty to act within powers – as a Director you should not exceed the powers conferred on you by the company’s Articles of Association. You should always check that you are using the powers conferred on you properly and that the Company does not exceed what it is allowed to do in its Memorandum of Association.
- Section 172 – Duty to promote the success of the company – as a Director you must act in good faith for the success of the company and benefit of the shareholders having regard to the likely consequences of any decision long term. This will include considering 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.
- Section 173 – Duty to exercise independent judgment – the company is a completely separate entity to you as director. Therefore, as a director you must consider whether a deal with the company which you own will be the best deal for the company as opposed to yourself. At the time a decision is made the matters raised in the rest of Chapter 2 of the Act need to be considered so that you are you acting in good faith and solely for the benefit of the company taking all the circumstances into account and not for example, creating a conflict as set out in Section 175 below.
- Section 174 – Duty to exercise reasonable skill and care and diligence – you should act in a manner that any reasonably skilled director would generally act in your particular area of management. You should go to as many board meetings as you can and make sure you know at all times what is happening. As stated, ignorance is no defence and as a director you will be jointly liable for any mistakes made as well as placing your company at risk of claims against it should it fail to use skill and care in providing its services to others or complying with other statutory requirements for example health and safety (Section 178) for example.
- Section 175 – Duty to avoid conflicts of interest – as a Director you must avoid a situation in which you have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company. If there is a conflict of interest between you (personally) and the company, ensure that the company always wins. The way to avoid there being any issues over conflicts is to disclose all matters to the board of directors so that the company (acting through its directors) can make a decision with all the facts in front of them.
- Section 176 – Duty not to accept benefits from third parties – as a Director you should refrain from dealing in your own interests rather than the company's when dealing with company business and property and must not, for example make a secret profit from any undisclosed and unauthorized transaction or divert work away from the company for your own benefit. Any benefits obtained in this way will have to be account for to the company even if the company benefits as well. You should not accept loans or the benefit of guarantees from the company. This section coincides with and extends Section 175.
- Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – as a director, you must disclose all interests in relation to all transactions for example property, information, shares held irrespective of whether or not the company could take advantage of it. You should obtain directors and shareholders approval when it is required before steps are taken. Again, this coincides with and extends the other duties in Sections 171 to 176 above.
- 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 and on top of the duties of directors in relation to specific areas applicable to your business such as health and safety, taxation etc.
- 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.
- In addition to the above, you should 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.
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.
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Martin Evans, Nial Ledingham or David Halfhead on 0800 135 7917 or alternatively by email on Martin.Evans@lemon-co.co.uk, Nial.Ledingham@lemon-co.co.uk
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