Many directors when appointed just want to get on with the business of running their company. They want to be creative and entrepreneurial. However, directors are responsible for the day to day management of their company. They are therefore subject to a number of checks and balances particularly those contained in legislation and whilst the directors should have the freedom to perform their duties as they see fit in terms of driving the business forward, balanced against this is the need to prevent them from abusing that freedom.
What are those duties?
These include but are not limited to:
The Companies Act 2006 codified certain common law and equitable duties of directors for the first time. Those general duties are:
Compliance with the company’s constitution such as its articles of association. The articles of association are the company’s internal rules and before action is taken, they should always be considered to ensure there is no contravention of any of the powers listed in the articles. So, for example the power to issue new shares must be used for the purpose of raising capital for the business and not a cynical attempt to keep voting control in friendly hands by only issuing shares to “buddies”.
As a director you must act in a way which you think is most likely to promote the success of the company for the benefit of its members as a whole. Various factors have to be considered when making a decision including the long-term consequences, the company’s reputation, the interests of other stakeholders such as employees or the community.
A director has a duty to exercise independent judgement, which means that they must not blindly follow the advice or instructions of a third party or fetter their discretion. This does not mean that the director must act in a vacuum, independently of everything around them. They are entitled to discuss matters with their fellow directors, rely on the advice and work of others and to delegate matters to board committees or individuals where it is appropriate to do so. But the director must consider whether or not it is reasonable to make a decision on the basis of such discussions, advice, work or the recommendations of relevant committees or individuals on a case-by-case basis.
A director has a duty to exercise the same reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:
A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the Company.
The scope of this duty is very wide and could include a situation such as a director who has an interest in a commercial opportunity that could also be exploited by the company e.g. property development;
A director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the Company has a duty to declare the nature and extent of that interest to the other directors before the Company enters into the transaction or arrangement (save for a couple of exceptions).
Who does it apply to?
It should also be remembered that these duties apply equally to all directors not just the executive team. Non-executive directors and shadow directors are also required to comply with the duties.
Why are they important?
A failure by a director to comply with any of the duties has potentially serious consequences for that director, namely the exposure to personal liability arising from a breach. Such liability can arise for example when a director permits the company to trade wrongfully or where a director has made a personal gain from knowledge about the company’s affairs which was not generally available to its members i.e. insider dealing.
There are circumstances where a breach of the duties can be ratified; or indeed a director can purchase insurance to help protect himself from the consequences of such breaches. Despite these protections, directors must still tread carefully as there can also be professional consequences arising from such breaches, for example they could be disqualified from acting as a director.
How can we help?
The team here at WCL have great experience in not only assisting clients understand their numbers so that they can run their companies appropriately, but we can also provide training and advice in relation to director’s duties, what they encompass and how to proactively avoid any unintentional issues.