Date: 14/10/2021 | COVID-19, Corporate
Covid has made sure that directors are well aware of their responsibilities in relation to health and safety, and legislation also imposes requirements on directors in lots of other specialist areas. However, in addition to that, there are also seven general duties every director has to their Company and these are set out in the Companies Act 2006. It is important to understand these, as failure to comply can have serious consequences. A successful claim against you can lead to:
As we move into the economic recovery phase, claims against directors for breach of duty are likely to increase as shareholders try to protect their investments.
So what are your legal duties?
1. Duty to act within powers
As a director you must act in accordance with the Company’s constitution and only exercise your powers for the purposes for which they were conferred.
2. Duty to promote the success of the Company
This requires directors to act in a way they think, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. In doing this there are six factors you must consider:
So what does this mean in practice? What is “success”? Really it means what the members collectively want the Company to achieve – usually a long term increase in value for most companies.
This duty does not apply if the Company is close to insolvency. In that case the directors need to be thinking about protecting the creditors’ interests to minimise their risk of prosecution for wrongful or fraudulent trading and incurring any personal liability.
3. Duty to exercise Independent Judgment
As a director, any decisions must be made by you independently, on their own merits, not in accordance with instructions from others.
4. Duty to exercise reasonable skill and care
Directors have to exercise the care, skill and diligence that would be shown by a reasonable person with both the general skills and experience reasonably expected of a director and the actual skills and experience that director actually has.
So, if a director has specialist knowledge, for example, is a qualified lawyer, accountant or engineer then a higher standard will be expected of them in that area than from someone without that level of professional knowledge.
5. Duty to avoid Conflict of Interest
Directors have to avoid situations where they have or may have interests that conflict or may conflict with those of the Company. So, for example, you couldn’t be a director of two companies both selling garden furniture.
This duty continues to apply after a person stops being a director in relation to property, information or opportunities they become aware of while they were a director. If the Company was offered a chance to buy a property and you resigned as a director and then tried to buy it yourself, that would be a conflict.
The duty is not infringed if it is not likely a situation will lead to a conflict or where it’s been authorised by the board or in some cases the shareholders. So, if you were a director of a furniture company and also of a bifold door company then that’s unlikely to be a conflict so won’t need to be authorised.
6. Duty to declare interest in a transaction
If a director has a direct or indirect interest in any existing or proposed transaction or arrangement with the Company, he must declare that. So, for example, if a director of the Company owned 50% of the shares in another business, Company X Ltd which was going to enter into a contract to supply beds to the Company then he would need to declare his interest as a shareholder of Company X.
7. Duty not to accept benefits from third parties
Directors must not accept gifts or benefits from third parties given because they are a director or to get them to do (or not do) something as a director.
There is no de minimis threshold but if accepting the benefit cannot reasonably be regarded as leading to a conflict of interest, then it is allowed.
What happens if Directors get it wrong?
These duties are owed to the Company so any breach could lead to a claim against the director by the Company. Boards of directors can be reluctant to take action against one of their own so in certain circumstances, a shareholder can bring a claim on behalf of the Company instead.
Understanding your duties is the first step towards protecting yourself and your assets from any potential liability but, there are also practical steps you can take:
As the economy recovers from Covid many companies may struggle to repay debts to HMRC, landlords and others. Shareholders will be looking very carefully at the conduct of directors to make sure the board has been acting properly and in their interests and so there is an increasing risk of claims against directors.
The message here is “do your duty” and if you need help in working out what that is or are concerned about previous or potential breaches, then call a member of our Corporate Team - we will be happy to help.
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