When you are appointed as a director of a company, you automatically acquire various duties towards the company and its shareholders – many having serious consequences of a breach. It is therefore essential that you understand the full extent of such duties but how do you go about finding out what they are – assuming you know you have any?
Companies House has started to send an advice note together with an explanatory letter to all newly appointed directors. Although the advice briefly details the ‘general duties’ it doesn’t explain the finer points or the serious potential consequences of a breach. While I wouldn’t expect the leaflet to give a full lecture on the ins and outs of the various rules, I don’t believe the content is sufficient to explain to those new to the title that it is a serious and onerous undertaking with equally serious and onerous consequences if you fail to carry out your role in accordance with the rules. There is certainly a risk that a director may inadvertently commit a criminal offence or become personally liable to the company financially as a result of complacency or a lack of understanding of the directorship role.
So, what are the general duties? The key statutory duties as set out in Companies Act 2006 are:
You must only act within your powers in accordance with your company’s constitution (the Memorandum and Articles of Association).
You must promote the success of the company. Your actions should always benefit the company’s members as a whole – not favouring any shareholder or group of them.
You must exercise independent judgement. You should not, for example, be unduly pressured into voting a particular way at a board meeting.
You must exercise reasonable care, skill and diligence. You would be in breach of this duty if you are incompetent or negligent in carrying out your role with the company.
You must avoid conflicts of interest. A conflict may arise where you have a direct or indirect interest which conflicts with the interest of the company – perhaps you have shares in a competing business or another organisation in your company’s supply chain.
You must not accept benefits from third parties. No doing business with someone just because they offer you personal incentives!
You must declare an interest in a proposed transaction or arrangement with the company. You need to keep your fellow directors aware of any personal interest you have in decisions to be taken by the board.
Just like the Companies House leaflet, this list isn’t intended to be a detailed and thorough explanation; it’s a pointer of some key issues to consider. It’s certainly not an exhaustive list and there are various other duties that you need to adhere to including confidentiality, acting in good faith and of course dealing with the administrative issues of accounts and Companies House filings. There are also a variety of defined topics where clear rules have to be followed and where breaches can have personal consequences for a director, for example, health and safety, insolvency and fraud.
The Consequences of Breach
If you breach your duties, the company itself, shareholders or your fellow directors could bring an action against you. This can include a request for:-
- monetary damages;
- an injunction to prevent you from taking certain actions (when a breach is threatened but not yet committed);
- setting aside a transaction so reversing it as though it had not taken place;
- returning company property; and
- paying the company profits you’ve personally received in consequence of your breach.
The main concern for most directors is the potential financial consequence of a breach. Just because you’re a director acting on behalf of a company rather than for yourself doesn’t automatically provide you with protection. If you’re found to have committed a breach of duty which costs the company money, a personal claim against you could follow. Be aware though that money can’t buy you out of every breach. Some breaches carry criminal sanctions and for the very worst offences, that can be jail time!
Don’t undertake a director role without serious consideration and always familiarise yourself with the duties. If you’re being asked to be a director as an honour or mark of respect, while that might be flattering, make sure you can comply with the duties as even where you only have a ceremonial title, you will probably still have to comply with all the duties explained here.
Finally, always make sure you have access to all the information you need to assess and make proper decisions and, if you need to, seek advice from colleagues, professionals and experts where you need it. It’s almost never a valid excuse to simply say, “I didn’t know!”
If you wish to speak to an expert on directors’ duties and corporate law, please contact Farleys on 0845 287 0939 or email here.