What is a director?
Although this may seem obvious, it is not necessarily just those people who are called ‘directors’. For instance, company law provides that a director includes ‘any person occupying the position of director, by whatever name called’. This means that if a person is fulfilling the role of a director, then he or she may be deemed to be one and fully liable as such. Equally, if the directors are accustomed to act in accordance with the directions and instructions of a third party, that person may be deemed to be a ‘shadow director’ of the company. Company law subjects shadow directors to many of the responsibilities of directors.
What is the director’s role?
Although companies are legal entities in their own right, they can only act through human agents. Company directors fulfil this role and the operation and management of the company is typically delegated to them. The directors’ powers to manage the company are subject to the terms of its constitution and any restrictions that may be contained within it.
Directors generally exercise their powers through the board of directors, which will meet to consider matters relating to the company and will make its decisions through resolutions. However, in practice, the running of a large company would be impossible if all decisions required a full board meeting. Whilst in small companies with few directors, day-to-day decisions can be taken at meetings of all of the directors, board meetings of larger companies are relatively infrequent and are generally used to discuss and formulate policy or to approve and authorise important transactions.
The operation of most companies is delegated to their executive directors, who are usually employed under the terms of a service contract with the company. A great many companies also appoint one or more non-executive directors, who are selected for their commercial experience and expertise, but who are generally not involved in the day-to-day running of the company and do not devote their whole working time to it. Their relative distance from the daily operations of the company gives them an objective overview, which operates to the benefit of members.
Which duties are imposed on directors?
As directors may be given extensive powers, the law imposes certain duties on them to safeguard the rights of shareholders and others.
Directors’ duties are now principally set out in a statutory statement of directors’ duties introduced by the Companies Act 2006.
The seven main general duties owed by directors to a company are as follows:
- to act within powers
- to promote the success of the company
- to exercise independent judgement
- to exercise reasonable care, skill and diligence
- to avoid conflicts of interest
- not to accept benefits from third parties
- to declare interests in proposed transactions or arrangements with the company
The statement codifies and replaces the common law and fiduciary duties that have been developed by the courts in case law over many years. The case law remains relevant.
In addition to the statutory statement, there are also a wide range of other duties imposed upon directors – for example under health and safety legislation and the insolvency legislation.
The statutory statement is by no means a “one-stop shop” for a full understanding of all directors’ duties.
There are various remedies that may be sought against directors for breach of their duties, depending upon the circumstances. These include both civil and criminal penalties, depending on the breach. In some cases, there may be opportunities for the director to mitigate his or her liability. In certain situations, the court may grant relief from liability if he has acted honestly and reasonably; in other circumstances, the shareholders of the company may ratify the unauthorised acts. It is also possible for companies to indemnify their directors against certain liabilities to third parties.
Finally, many companies purchase Directors and Officers Liability Insurance to protect their officers against such liabilities.
We advise private companies and their directors on a full range of corporate governance issues. We also advise on relations between shareholders and on resolving any disputes that may arise and we also advise on the various applicable duties on directors where underperformance distress or financial crises are being experienced.
Frequently Asked Questions
What changes have been made to my duties as a director? The Companies Act 2006 provides for a statutory statement of directors’ duties which replaces the current common law and fiduciary duties. In many ways these duties are similar to existing duties but there are some significant changes. There have also been changes to the rules on directors’ dealings with their companies – for example, it is now permissible for companies to make loans to their directors with prior shareholder approval.
What are my duties as a director? Directors generally have responsibility for the day to day running of the company and the management of its business. The seven main general duties owed by directors to a company are set out above:
Looking beyond these internal duties, directors also have wider duties imposed by statute and breach of these statutory duties will usually be a criminal offence, punishable by fines or imprisonment.
- Isn’t there one set of rules I can follow?
Unfortunately, there is no one place for a director to look for his responsibilities. Even though the statutory statement of directors’ duties condifies (with some significant changes) and replaces the common law and fiduciary duties that have been developed by the courts in case law, the case law remains relevant in terms of interpreting the statutory statement. As well as the statutory statement of duties, there are also a wider range of other duties imposed upon directors, eg under the insolvency legislation
- What are my obligations to shareholders of the company?
The changes introduced by the Companies Act 2006 are anticipated to make it significantly easier for shareholders to enforce directors’ duties on behalf of the company.
A key change is that shareholders may be able to bring claims against directors for alleged negligence if the company fails to pursue them. However, any claim must still be brought in the name of the company so shareholders bringing such claims will benefit only indirectly. There are also safeguards against frivolous claims so it may be that this will not greatly increase the risk to directors.
- What is a shadow director?
A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. An example of a shadow director would be a major shareholder whose instructions the directors would always obey, without independently using their judgement.
For many purposes of the Companies Act and the Insolvency Act, shadow directors are deemed to be directors and can be liable for breach of the duties imposed on directors in the same way as any other director.
- Can I be personally liable to third parties for my actions as a director?
Other than directors’ liabilities to the Company and its shareholders, directors are not generally personally liable in carrying out their functions. For example, if a director signs a contract on behalf of the company he will not be liable to the other party if the company then breaches it. However, there are duties imposed specifically by statute, for example, under the Companies Act and Insolvency Acts, which can result in third party liability.
A key situation where a director can be held personally liable for the debts of a company is if he continues to allow the company to trade when he knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.
The provisions of the Act extend to shadow directors (those who are not appointed directors but whose decisions the company follows) and de facto directors (those who act as directors although they have not been formally registered as a director at Companies House) in circumstances as before. They also apply to a person who ceases to be a director.
It is important that any director whether of a big or small company is familiar and complies with their duties. Ignorance is no defence and; the consequences can be severe both for the company and personally. As a director you have no hiding place, you must always act in the best interests of the company.
It is particularly important when a company is in financial difficulty to consider the duties which are placed on directors.
It is reasonable to split the workload of directors based on the talents of the individuals. However, all directors are jointly responsible for the company and the duties towards it. If you are appointing directors with specific expertise such as an accountant as finance director they are also expected to use their professional skills in the best interests of the company.
Sometimes, it is difficult to distinguish between the individual running and | or owning the business and the company. However, the company must be seen as a distinct entity separate from the directors and shareholders.
We have vast experience in advising directors of their duties in any specific situation. If you have any specific questions we will be happy to answer them (and strongly suggest that you ask before any trouble occurs) or come and see you to discuss director’s duties and potential liabilities and other issues in the context of your business particularly in the context of financial distress and crisis.
For more see Directors Duties Checklist
For more see Directors Duties Liabilities In FInancial DIstress
For more see Practical Guidance for Directors
The Venture Consulting Team