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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:
The company’s constitution includes its Articles of Association, along with any relevant shareholders agreement or resolutions.
Directors should read the article and understand what limitations are imposed
When considering what is most likely to promote the success of the company, a director must take into account:
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
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.
This relates to actual and potential situational and transactional’ conflicts and incorporates direct and indirect interests.
Beware falling foul of The Bribery Act
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.
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.
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.
A third reason to speak to insurance brokers about Directors and Officers (D&O) insurance.
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.
That’s the sales pitch!
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.