In the last few years, new legislation has aimed to prevent company directors from acting irresponsibly. However, the effect of such legislation has been to codify for the first time the duties owed by directors to companies, their shareholders and to the broader community, and to impose heavier burdens on company directors who are determined to act irresponsibly.
Directors’ Statutory Duties
The Companies Act 2006 sets out seven basis principles governing a company director’s behaviour, by imposing specific duties on the director. These are:
- the duty to act within the director’s powers. The law and the company’s constitution set out what powers a director has. These powers relate to the matters upon which a director can take action or make decisions on behalf of the company, and the procedures which must be followed.
- the duty to promote the success of the company. This does not simply mean that a director must always make decisions so as to maximise the company’s profit. The law provides that the director must always consider:
- the likely long-term consequences of his decisions;
- the interests of the company’s employees;
- the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the environment and community;
- the company’s reputation for high standards of business conduct;
- the need to act fairly as between shareholders.
- the duty to exercise independent judgement. Company directors should always act independently and not allow themselves to be controlled by others.
- the duty to exercise reasonable care, skill and diligence. What this means depends on any special skill or knowledge a director has. For example, a company director who is also an accountant would have a higher duty of care in financial management than one who has no special knowledge of financial matters.
- the duty to avoid conflicts of interests. Directors must not allow themselves to fall into situations where their duties to the company are in conflict with their personal interests or duties to others.
- the duty not to accept benefits from third parties. A director may not accept any benefit (this would include bribes) which is offered simply because of his position as director.
- the duty to declare interests in a proposed transaction with the company. Directors must inform the company if there is any proposed transaction with the company in which the director has a direct or indirect interest. The company’s articles of association will usually provide that a company may still be involved in the decision making process regarding such transactions, if the director has properly declared his interest.
Action for a breach by a director of his duties can generally only be brought by the company. However, where breaches of directors’ duties are prejudicial to shareholders, in certain circumstances the shareholders themselves may take action.
Other responsibilities of directors
In addition to the statutory duties set out above, directors are also required to keep proper accounting records, which properly reflect the financial affairs of the company. They are also required to maintain up-to-date registers of shareholders and directors, and a record of all shareholder and director resolutions. These records are commonly called the statutory books.
Personal liability for the company’s affairs
A company is a distinct and separate legal entity from its directors (or shareholders). While directors who carry out their duties properly are generally free from personal liability, there are certain circumstances where a director may be personally liable:
- if a director is in breach of his duties, he may be personally liable for any loss the company suffers as a result
- company directors may be criminally liable if they provide information regarding the company’s affairs which they know to be false or misleading, if the intention is to deceive creditors or shareholders
- directors may be liable to shareholders if they knowingly permit any transfer of shares in contravention of restrictions in the company’s articles of association
- if the company is guilty of tax evasion, the directors may be personally liable for the unpaid tax
- if the director allow the company to trade knowing that it is insolvent, they may be personally liable for obligations incurred after the point at which they became aware of the insolvency.
Protecting directors and others
There are steps company directors can take to protect themselves against liabilities and claims for breach of duty. There are also steps the company can take to protect it against wrongful acts by its directors. Useful measures include:
- ensuring that the articles of association make clear any relevant issues, such as whether directors can vote on issues in which they have an interest
- ensuring that the books and records of the company are accurate and kept up to date
- putting proper service contracts in place between the company and the directors
Appointment and removal of directors
Shareholders do not have the automatic right to nominate or appoint directors (or to block their appointment). The company’s articles may contain special provisions on how directors are appointed. In addition, a shareholders agreement may give specific shareholders the right to act as or nominate directors.
Removal of directors is not necessarily an easy process. A director will automatically be removed if he dies or if he the subject of a Directors Disqualification Order. A director may also generally resign at will. However, should the company or shareholder wish to remove a director form office against his will, then the shareholders must vote on the matter at a general meeting, on not less than 28 days notice, and a simple majority of the shareholders’ votes will be sufficient to remove the director.
How can we help?
We have a wealth of experience in advising on matters relating to company directors and the way they conduct the affairs of the company. We can assist directors with the interpretation and application of their duties and we can advise shareholders who are considering removing a rogue director. We are also very experienced in preparing and advising on directors’ service agreements. If you have any questions or are looking for information on directors or any other business law matter, please contact Catherine Drew