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Directors Duties - Stick Your Nose In Your Own Business!

There is often a misconception that once someone is appointed director of a limited company they can pretty much act as they please. It is not that simple. This blog post seeks to explain a little about some of the issues that arise when taking on the appointment as a director and how some of the pitfalls may be avoided.

So to the legal basics…

Directors are appointed by the shareholders to manage the day to day business of the company. The Companies Act 2006 sets out the general duties of company directors. These being as follows:

  1. To act within your powers (Section 171):  A director must act in accordance with the company’s constitution and only exercise their power for the purposes of which they were given.

The company’s constitution includes its Articles of Association, along with any relevant shareholders agreement or resolutions.

Top tip!

Directors should read the article and understand what limitations are imposed

  1. To promote the success of the company for the benefit of its members as a whole (Section 172): A director must act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole.

When considering what is most likely to promote the success of the company, a director must take into account:

  • The long-term ramifications for the company;
  • The interests of its employees;
  • Promoting good working relationships with customers, suppliers and others;
  • Whether a director is acting fairly between company members;
  • The company’s impact locally, and on the environment in general; and
  • Maintaining the company’s reputation for high standards conduct.

Top tip!

Ask individuals who you know may be directors and ask them what they think their obligations are. Chances are few will get at least two of the six points above

 

  1. To exercise independent judgement (Section 173): A director has a duty to maintain independent thought, without being swayed by certain individuals or groups.

 

  1. To exercise reasonable care, skill and diligence (Section 174): A director must exercise the same skill, care and diligence that would be exercised by a reasonably diligent person with:
  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company; and
  • the general knowledge, skill and experience that you actually possess.

Top tip!

There has been lots of litigation over what “reasonably” means. You need to have some degree of skill and knowledge or retain organizations who can advise where required.

  1. To avoid conflicts of interest (Section 175): A director must avoid a situation in which they have, or could have an interest that conflicts, or may conflict with the interests of the company.

This relates to actual and potential situational and transactional’ conflicts and incorporates direct and indirect interests.

 

  1. To not accept benefits from third parties (Section 176): A director must not accept a benefit from a third party by reason of his being a director or his doing (or not doing) anything as a director.

Top tip!

Beware falling foul of The Bribery Act

  1. To declare an interest in proposed or existing transactions or arrangements (Section 177): Directors need to declare the nature and degree of their interest in any proposed or existing transactions, whether that is a direct or indirect interest.

Top tip!

Always minute these interests when they arise

To whom does a director owe their general duties to?

Director’s general duties are owed to the company of which you are director and not the shareholders themselves. The company and not the shareholders can take action against a director if there is a breach of duty.

Top tip!

Directors should speak to their insurance brokers about Directors and Officers (D&O) insurance.

What are the penalties for breach of director’s duties?

A breach of a general duty typically gives the company a number of potential remedies including an injunction, damages or compensation. Failure to disclose an interest in an existing transaction or arrangement with the company also carries the risk of a criminal fine.

In extreme cases particularly involving breaches of Health and Safety- Directors could find themselves on the wrong end of a criminal prosecution.

Top tip!

A second reason to speak to insurance brokers about Directors and Officers (D&O) insurance!

What are the director’s responsibilities on insolvency?

Where a company is in financial difficulties the director’s should seek independent advice as soon as possible if they are to avoid potential personal liability under insolvency legislation. The potential risks for a director in this area are complex and include the risk of being disqualified from holding the position of director or being involved in the promotion or management of a company for a period of up to 15 years.

 Top tip!

A third reason to speak to insurance brokers about Directors and Officers (D&O) insurance.​

Conclusion

This article is not a blatant sales pitch by Brethertons to sell you D & O cover- in fact we don’t sell it at all. It is however an attempt to remind directors that whilst limited liability can give individuals some degree of protection, it is not and never has been complete protection.

A director has an obligation to know and understand what the business does and then act legally and appropriately. A director can only do that if they do fully understand at what stage the business is at, how it operates, where it is going andwhat the businesses shortcomings are .

At Brethertons we have developed a TKW (The Knowledge Within) Audit which aims to help directors understand some of the issues that their business may face. You can read more about the TKW audit process here. The audit is free of charge to Brethertons customers.

If you would like to be a Brethertons customer and find out more about a TKW Audit contact our Commercial Director Shaun Jardine via shaunjardine@brethertons.co.uk

That’s the sales pitch!

 

Sukhdeep Thandi

 


Please treat the contents of our blogs as general guidance only. Please do not take any action based on their contents unless you have sought specific legal advice. Brethertons cannot accept responsibility for any errors or inaccuracies, loss or damage in circumstances where there is no formal retainer between us and we have not given you personal and specific advice relating to a matter for which you have given us full background details.  You must also bear in mind that the contents of our blogs are based on English Law, and because they contain archival material, that material is likely to go out of date. Therefore, it is important to consider the date that the blog was posted. Please also remember that the law may differ in different Jurisdictions.