Directors Responsibilities

The position of director brings both rewards and responsibilities upon an individual.

Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement.

However the office of director should not be accepted lightly. It carries with it a number of duties and responsibilities. We summarise these complex provisions below.

Please come and talk to us if you would like more information. This is currently particularly important following the advent of the Companies Act 2006. The new Act will further clarify and codify what is expected of directors and will become effective during 2007 and 2008.

Companies

You can undertake business in the UK as either:

  • An unincorporated entity, ie a sole trader or a partnership or
  • An incorporated body.

An incorporated business is normally referred to as a company. Although there are limited liability partnerships and unlimited companies the vast majority of companies are limited by shares. This means the liability of shareholders is limited to the value of their share capital (including any unpaid).

A limited company can be a private or public company. A public company must include ‘public’ or ‘plc’ in its name and can offer shares to the public.

The responsibilities and penalties for non compliance of duties are more onerous if you are a director of a public company.

Directors

When you are appointed a director of a company you become an officer with extensive legal responsibilities. The Companies Act 2006 sets out a statment of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The new law, contained in the Companys Act 2006, extends this by highlighting the connection between what consitutes the good of your company and a consideration of its wider corporate social responsibilities.

The legislation requires that directors act in the interests of their company and not in the interests of any parties (including shareholder). Even sole directors/shareholder companies must consider the implications by not putting their own interests above those of the company.

The ain of the codification of directors’ duties in the Companies Act 2006 is to make the law more consitent and accessible. It should be noted that the other existing duties will continue to apply alongside these new statutory duties.

The Act outlines seven new statutory directors’ duties, as detailed below.

Duty to act within their powers
As a company directore, you must act only in accordance with the company’s constitution, and must only exercise your powers for the puposes for which they were conferred.

Duty to promote the success of the company
You must act in such a way that you feel would be most likely to promote the success of the company (ie. its long-term increase in value), for the benifit of its members as a whole. however, you must alsoconsider a number of other factors, including.

  • The likely long-term consequences of any decision
  • The interests of company employees
  • Fostering the company’s business relationships with suppliers, customers and others
  • The impact of operations in the community and enviroment
  • Maintaining a reputation for high standards of business conduct
  • The need to act faily as between members of the company.

Duty to exercise independent judgement
You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an aggrement entered into by trhe company which restricts the future the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence
This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objected’ standards you must exercise resonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and dilgence which may resonably be expected of a persons who is caying out the functions of a director (objective). So a director with significant experence must exercise the appropriate level of expertise.

Duty to avoid conflicts of interest
This dictates that, as a director, you must avoid a situation in which you have or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company. This Duty applies in particular to a transaction entererd into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.

This clarifies the previous conflict of interest provisions, and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as centain requirements are met.

Duty not to accept benifits from third parties
Building on the established principle that you must not make a secret profile as a result of being a director, this duty states that you musr not accept any benifit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.

This duty applies unless the acceptance of the benifit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty to declare interest in a proposed transaction or arrangement
There was an existing requirement for directors to disclose an interest in a proposed transaction. the new duty under the Companys Act 2006 extends this futher and requires that any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must delcare the ‘nature and extent’ of that interest to the other directors before the company enters into the transaction or arrangements. A futher declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.

However, the requriement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of onterst, or where other directors are already aware (or ‘ought reasonably to be aware’) off the interest.

Enforcement and Penalties

Although the common law duties have been extended and incorporated into Company Law, the Act states that they will be enforced in the same way as the common law. As a result there are no penalties in the Companies Act 2006 for falling to undertake the above duties correctly.

Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:

  • The company itself (ie the board or the members in general meeting) deciding to commence proceedings; or
  • A liquidator when the company is in liquidation.

Where the company is controlled by the directors these actions are unlikely.

However the Act has also introduced new legislation whereby an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omsission (involoving negligence), default or breach of duty trust.

How We Can Help

You will now be aware that the postition of director must not be accepted lightly.

  • The Law designed to penalise those who act irresponsibly or incompentently
  • A director who acts honestly and conscientiously should have nothing to fear.

We can provide the professional advise you need to ensure you are the latter category.

Contact us today to arrange a free initial meeting with John Galley to discuss your requirements.

 

 

How can we help?

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