Setting up your business as a private limited company is an exciting step for any venture. But make sure you know what’s expected of you now that you’ve incorporated your business. If you are appointed as a director, then you have certain duties to uphold.
These duties are automatically imposed on you by the Companies Act 2006, and specifically in sections 171-181 (if you want to look them up). You can’t opt out of them and breaching these duties will get you in hot water with your other directors, your shareholders and even the courts.
Make sure you know what you’re letting yourself in for when you agree to be a director of a company.
What are my duties?
As a director, these are the duties that you owe to your company. It’s important to note the second half of that sentence. You owe these duties to the company itself, not the board or the shareholders in isolation. More on that later.
Your duties are:
· Duty to act within your powers
Your powers will be set out in as your company’s memorandum and articles of association. You’ll also have powers conferred on you for a particular purpose, such as negotiating a contract. An example of overstepping your powers would be entering into a contract worth £2,000 when the company’s articles only permit you (acting alone) to enter a contract worth less than £1,000.
· Duty to promote the success of the company
You have to promote the success of the company for the benefit of the members as a whole. However, weighing up your decisions against this standard can be complex and multifactorial. To make this a little fairer for directors, and to take away the upper hand from Captain Hindsight, the courts apply a subjective test. That means that as a director, you have to honestly believe that the decision you took promoted the success of the company for the shareholders.
· Duty to exercise independent judgment
The purpose of this duty is to make sure that you don’t contract out your decision-making. An example of breaching this duty would be entering into an agreement with a shareholder, that you will vote in a particular way at a board meeting.
· Duty to exercise reasonable care, skill and diligence
This is one duty that generates considerable litigation, as it acts as a quasi catch-all for poor decisions. The purpose of this provision is to get you to think about carrying out your role sufficiently carefully and competently. You will find yourself in breach if you act in a way that’s negligent or you fall below an acceptable standard of behaviour.
· Duty to avoid conflicts of interest
This is a very widely drafted duty in the Companies Act 2006. That means that even indirect conflicts and possible conflicts are caught by this provision. You would be in breach of this duty if, for example, you set up a new company to service a contract that you negotiated on behalf of another company, for which you work(ed) as a director.
· Duty not to accept benefits from third parties
This one may surprise you and it’s a reminder to be careful about accepting things like corporate hospitality. Those perks are fine to accept, so long as the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. But you should also take proper precautions to declare it on a gifts register so that you don’t get tripped up by the Bribery Act 2010.
· Duty to declare interest in a proposed transaction
This duty exists to make sure that the board of directors know in advance if an individual director stands to make personal financial gain, either directly or indirectly, before they decide whether or not to enter into a transaction.
Why does it matter?
Ultimately your business is going to be more successful if you uphold your director’s duties. The duties provide the standards to behave responsibly towards your shareholders and your fellow directors. By maintaining these standards, you cultivate trust within your business, and with the wider public who engage with your product or services.
Those are the positive reasons to uphold your duties. But you also have the looming deterrent of the consequences of a breach.
Consequences of breaching directors’ duties
As we mentioned earlier, your director’s duties are owed to the company. So it makes sense that the company itself must take action against a director for breach of his or her duties. What’s less obvious, is how a company brings an action. While the company is a legal entity in its own right, how practically, can it bring an action? It’s usually done in one of two ways: (i) a majority vote by the board of directors, or (ii) the shareholders bring a derivative claim.
If a director is found to be in breach of their duties, they are personally liable for the losses suffered by the company. The director may face an injunction (to prohibit him from taking an action, or to force him to take another course of action), damages and / or compensation payable to the company.
In some circumstances, the breach may result in the director’s disqualification. Directors can be disqualified for two years for the least serious breaches, but the disqualification period can be as long as 15 years for more serious offences.
For the most serious breaches that amount to criminal offences, a director can be fined and may even face a prison sentence. While prison sentences are rare, it’s worth being aware of the possible consequences of falling short of the standard expected of a director. Particularly if you work in an industry that’s heavily regulated by Health and Safety, directors can and do go to prison for HSE offences.
How we can help
Directors’ duties are legally complex and it’s not usually black-and-white which decisions fall short of your duties. We can help you stay on the right side of the law.
If you think you want to bring a claim against a director, either from a shareholder point-of-view or as a fellow director, we can handle it for you and advise you from start to finish. Please get in touch to discuss it.