Let's not forget directors’ duties when managing company affairs

Let's not forget directors’ duties when managing company affairs

Imanpreet Suthar is a Solicitor in the Corporate & Commercial Department of Axiom Stone Solicitors, a full-service legal practice with offices in London (Edgware, Mayfair and Harrow) and Birmingham.

In this special column she addresses issues related to the responsibilities and duties of company directors.

Directors may have the misconception that they are entitled to do what they want when running a company, when they are actually subject to a number of statutory duties.

These duties aim to protect shareholders, by ensuring that the directors can be held accountable for the way that they manage the affairs of the company.

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The main general duties that a company director owes are set out in sections 171 to 177 of the Companies Act 2006 (the “Act”):

  1. Act within their powers: this means that company directors must act in accordance with the company’s constitution, which primarily includes its articles of association.

  1. Promote the success of the company: the various factors for directors to consider when making decisions (and thereby fulfilling this duty) are set out under section 172 of the Act, and include the long-term consequences of decisions, the interests of employees and even the impact to the community and environment.

  1. Exercise independent judgment: while directors can act upon professional advice they have taken in their decision-making role (provided that they exercised their own judgment to do so), they must avoid being manipulated by another director or shareholder of the company.

  1. Exercise reasonable care, skill and diligence: they are expected to exercise the care, skill and diligence that another director in a similar company would exercise. However, the standard is raised where a director has particular skills (e.g., they are a qualified accountant).

  1. Avoid conflicts of interest (“situational conflicts”): a director must avoid situations in which they have, or can have, a direct or indirect interest that conflicts or potentially conflicts with the company’s interests. Importantly, this duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company (see item 7 below). “Interest” is a broad term and could also include the interests of people that the director is connected to (e.g., close relatives) or any other company that the director may control. As a result, there are many potential examples where this duty applies, and it is always best to seek legal advice.

  2. Accept benefits from third parties: directors cannot accept such benefits because of a director’s position or because they do (or choose not to do) anything as a director. However, this duty is not breached if acceptance of a benefit cannot reasonably be regarded as giving rise to a conflict of interest.

  1. Declare any interest in a proposed transaction or arrangement with the company (“transactional conflicts”): this is to ensure that the board are fully aware of a director’s interest in a proposed transaction/arrangement before it is completed. A similar duty applies where a director becomes interested in an existing transaction or arrangement.

There are various common law and equitable remedies available to a company when a director is in breach of any of the above duties; certain cases could even amount to a criminal offence, resulting in fines, disqualifications and in more serious cases, imprisonment.

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Other key duties include:

  • Insolvency: directors should in their role keep up to date with the financial affairs of a company. In the event that the company becomes insolvent, the general duty to act in the best interests of the company’s shareholders switches to a duty to act in the best interests of the company’s creditors. Under the Insolvency Act 1986, any wrongful or fraudulent trading undertaken by an insolvent company under a director’s watch can lead them to severe penalties.

  • Companies House filings: Companies are required to file certain documents at Companies House each year, such as confirmation statements and annual accounts. Failure to do so within the prescribed time limits enables Companies House to criminally prosecute the directors of the defaulting company.

  • Bribery Act 2010: Directors have a duty to prevent bribery occurring in their organisation, by ensuring that adequate procedures are in place to prevent such situations.

  • Equality Act 2010: a director may be liable (either personally, or jointly and severally with the company) where discrimination (direct or indirect), harassment or victimisation takes place, even in the ordinary course of business.

  • Health and safety legislation: Directors must ensure that health and safety is properly managed and that risks are effectively identified and controlled. If an employee or member of the public is injured as a result of a company’s breach of health and safety laws, then a director could potentially face personal liability.

It follows that directors’ duties should not be overlooked, and active compliance is a key part in the successful running and performance of a company.

by Imanpreet Suthar

Immy Suthar is a Solicitor in the Corporate & Commercial Department of Axiom Stone Solicitors. She advises clients on a range of commercial matters such as mergers & acquisitions, joint ventures, company reorganisations, corporate borrowing, investments and other corporate governance issues.

*Info: If you have any queries in relation to the issues raised in this article, please feel free to contact Immy Suthar: IS@axiomstone.co.uk

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