Being offered the role of director of a company can be exciting and rewarding, however, the role comes with huge responsibility. The board of directors are the decision making entity that runs the day to day business of a company. Directors make strategic and operational decisions and have a variety of matters to consider when making such decisions.
The Duties
Due to the responsibility attached to the role, there are various duties which must be complied with:
- Duty to act within powers – a director must act in accordance with the company’s constitution (including articles of association) and only exercise powers for the purpose for which they were given.
- Duty to promote the success of the company – a director must act in good faith in the way which would be most likely to promote the success of the company for the benefit of its members as a while. This duty is overarching and requires directors to consider:
- The likely consequences of any decision in the long term;
- The interests of any company employees;
- The need to foster the company’s business relationship with suppliers, customers and others;
- The impact of the company’s operations on the community and the environment;
- The desire for the company to maintain a reputation for high standards;
- The need to act fairly between members of the company
This list is not exhaustive and any other relevant circumstances in specific scenarios must be considered. The factors will carry differing weight with different decisions and so to avoid and address any future scrutiny, directors should note the factors and their reasoning when making decisions. This is particularly important when making some of the more controversial decisions that may arise.
- Duty to exercise independent judgment – a director must not allow themselves to be influenced by a third party when making decisions
- Duty to exercise reasonable care, skill and diligence – this is the care, skill and diligence which would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may reasonably be expected of a director, and the knowledge, skill and experience that the director actually has. Therefore, directors with a specific skill set, e.g. also a qualified accountant, will have a higher threshold to meet. This also encompasses a duty to remain informed of the company’s business and dealings. A director therefore cannot enjoy ignorance and be allegedly blissfully unaware of events within the company that they should have taken steps to become aware of.
- Duty to avoid conflicts of interest – directors must avoid being placed in a position or scenario where their personal interests (or duties they owe to a third part) conflict or may conflict with the company’s interests. If a director has personal interests, approval from the company can be sought to avoid any issues, however this is not guarantee.
- Duty not to accept benefits from third parties – directors must not exploit their role for personal benefit and therefore cannot accept any benefit in return for doing/not doing something. A ‘personal benefit’ is widely defined and can capture a wide range of things, and so care must be taken and difficult situations avoided.
- Duty to declare interest in proposed transaction or arrangement with the company – if a director is directly or indirectly interested in a proposed transaction, full disclosure must be given to the company. If the interest is declared with frank disclosure, the risk that the transaction is ruled invalid at a later date is diminished and takes away the director’s liability in this respect.
A further specific duty arises where a company becomes insolvent, or an insolvency is likely. It requires directors to consider the interests of the company’s creditors when making decisions. This can be difficult, especially where no insolvency is yet initiated, as directors will have to continue to consider the interests of the members and weight this with all the other duties.
The Common Problem Areas
Common decisions which can frequently result in allegations of wrong doing include:
- Directors’ remuneration – how much a director is paid for their service can be a bone of contention and should always be approved by the company;
- Taking on high risk contracts e.g. agreeing generous credit terms with a risky customer for a high value contract
- Improper payments and incomplete payment records – it is imperative that directors keep complete and accurate accounts to demonstrate their decisions along with reasons for justifications in the event that a decision is ever challenged
- Releasing debts - forgoing payment of legitimate debts can be risky and would need carful consideration as to recoverability etc
- ‘Ignorance is bliss’ directors – directors who chose not to take any active role or refuse to engage with the running of the company can still be open the allegations as they do not avoid their duty to promote the success of the company. An excuse that they were not aware, will not be sufficient in most cases
The Consequences
Allegations of wrongdoing can lead to civil actions being commenced by the company against the director personally. If such a claim is successful, a director could be ordered to pay damages to the company, account to the company for any benefit/profits made by them and/or return/restore any company property received by the director. Transactions which completed during the alleged wrongdoing can also be void or voidable by the Court. A company may also seek injunctive relief to compel or prevent the director from taking certain steps.
In the meantime, it is also likely that the company would seek to terminate the director’s service contract, immediately impacting their income.
The Solutions?
One of the most practical ways for a director to protect themselves against potential losses is to ask the company to obtain and maintain insurance for their benefit. Insurance can be obtained to cover liability for acts of negligence, default and breach of duty. These policies can then be called upon if any allegations of wrong doing are ever raised.
In terms of day to day, it is vital that directors document and note reasons for decisions and take the appropriate advice when needed including independent legal advice and accounting input.
If you require any advice regarding your position as director, or any wrongdoing by a company’s director, please do not hesitate to contact our Commercial Dispute Resolution Team.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
