Between July and September 2019 a total of 169,751 new incorporations were registered at Companies House, each with at least one director. It is possible to be registered as a Company Director with a few clicks on the Companies House website, and yet many individual directors do not appreciate the significance of the role or the legal duties which apply to them. Many charity trustees are also company directors for the purposes of company law. This article sets out the primary duties on a company director for matters which may arise in the operation of a company.
There are many sources of obligations on a company director. The primary source is in the Companies Act 2006 which sets out the headline expectations of a director:
1. Act within powers– this means that the director must act in accordance with the company’s constitution (otherwise known as articles of association, which may be the ‘Model Articles’ promoted by Companies House). A company director must also be careful to act on behalf of the company within the remit of the Companies Act 2006, such as when either the law or the articles of association require shareholder approval for any specific action by the company.
2. Promote the success of the company– this means that the director must act in good faith so as to ensure that the company is most likely to succeed.
3. Duty to exercise independent judgment– this means that the director should be able to act independently of others, including shareholders and other directors, especially in circumstances where conflicts of interest arise.
4. Duty to exercise reasonable care, skill, and diligence– company directors are expected to act to a certain standard of competence. This is measured both objectively – so compared to the notional competent director – but also taking into account their own skills, so if the director is a qualified accountant they would be expected to apply their skills at a higher level than an unqualified director.
5. Duty to avoid conflicts of interest– company directors should ensure that they avoid conflicts of interest with their company. The best remedy to this is to declare possible conflicts to the other directors and shareholders. This is required as a matter of law when taking decisions at official meetings which may require the director not to vote on certain matters.
6. Duty not to accept benefits from third parties – a director should only be remunerated within the arrangements of their appointment, and must be aware of anything that could be construed as a third-party benefit. Consideration to the Bribery Act 2010 may also be needed.
7. Duty to declare interest in proposed transaction or arrangement– this duty is related to the duty to avoid conflicts of interest, above. It is essential that directors make the relevant declarations at formal meetings to avoid breaching this section. A defence can be mounted if the interest cannot be reasonably regarded as likely to give rise to a conflict of interest, or if the other directors are aware, but the safest route is to make the declaration before any company transaction occurs. A failure to declare an interest in an existing contract is a criminal offence punishable by way of a fine.
A good way of helping to ensure that a director acts in accordance with their duties is to ensure that all decision making is properly documented by way of company minutes, ideally with the assistance of a trained company secretary.
If a director breaches these obligations, they can be sued by the company, either at the instigation of the directors or shareholders, and may be investigated by the Insolvency Service or a liquidator in the event of an insolvency situation.
These duties are best understood as between the director, as an individual, and the company itself. It should also be noted that a director holds what is termed a ‘fiduciary duty’ towards the company – this means that there is an enhanced duty of loyalty and service to the company which is expected of the director by virtue of the role.
An additional source of obligations can be found in the director’s service contract, if one has been agreed. This is a useful document which creates a contract between the company and the director if the shareholders want to better specify the expectations of the role, and takes the form of an employment or service agreement. This can be useful to set out additional obligations which go beyond those set out above, and also protect the director. Scarmans can assist clients in drafting a directors service contract if required.
Further obligations of company directors include important reporting requirements to Companies House. A company director holds responsibility for ensuring that many of the records at Companies House are kept up to date, including the registration of new directors, the filing of the annual confirmation statement, and the regular filing of accounts. Breach of many of the reporting regulations is a criminal offence, and may also lead to disqualification as a director if an individual is investigated by the Insolvency Service. The appointment of a trained and competent company secretary can reduce the risk of an inadvertent breach of these provisions, as can the receipt of early legal advice.
Care must also be taken to observe duties imposed by the Insolvency Act 1986, for example when the company is either insolvent or close to insolvency. Company directors can also be liable for some acts of the company, such as where the company has infringed protected trade marks, or commits other criminal offences.
In the event that a director is in breach of their duties, they can be ordered to pay the company any profits made from their breach, and compensation. Additional sanctions include being removed or disqualified as a director, criminal convictions, and even having personal liability for the debts of the company (such as if a director causes the company to trade whilst insolvent).
For those who are closely involved in the operation of companies, care must be taken not to become a ‘shadow’ or ‘de facto’ director. A shadow director is someone who is not formally registered as a director, but does give instructions as to how the company should operate which are followed by the company. A de facto director is someone who acts as if they are a director but has not been formally appointed or registered. The law, in some situations, can treat a shadow or de facto director as if they have been appointed, so the above duties can apply to them notwithstanding the lack of registration. We can advise clients as to whether or not they are at risk of being found to be a shadow or de facto director, and steps to reduce that risk.
The team at Scarmans are experienced in the defence and prosecution of company directors who are alleged to have breached their duties, both in the civil and criminal courts. It is essential that those under investigation by the Insolvency Service, a liquidator or trustee in bankruptcy, or the police have legal advice as to their obligations at the earliest stage so that they can protect their position. Scarmans also advises and represents shareholders and companies who have concerns about a director’s conduct who may wish to bring a claim against them. Given the wide range of civil and criminal offences which may be committed, it is essential that those who may need legal advice receive it from those experienced in the many different areas of law which may apply to the circumstances of a company director.
Contact: bs@scarmans.co.uk