Directors’ Duties and Avoiding the Hot Seat

07 August 2018

The fundamental principle of company law is that a limited company is a separate legal entity, meaning the company will be held liable for its actions, debts and obligations as opposed to the directors. This is known as the “corporate veil”, behind which the directors are usually protected from liability. However, this shield is not impenetrable and in certain circumstances a court may pierce the corporate veil and find the directors personally liable. As a result, it is vital that directors understand their duties and how to minimise the risk of sitting in the hot seat of personal liability.

Directors’ Duties and Avoiding the Hot Seat

The Companies Act 2006 codifies a number of the general duties a director owes to the company, which the company can enforce should the director fall foul. These include the duty to act within the powers as set out in the company’s constitution i.e the articles of association. Therefore it is important that a director checks the articles to ensure they have the requisite power to take a certain action, make a particular decision, has complied with the specific requirements for calling a shareholder’s meeting and obtained consent where required and so forth.

Directors also have a duty to act in “good faith” and promote the success of the company with regard to likely long term effects of a decision, the interests of the employees and company reputation.

There are more specific duties, such as declaring an interest in a transaction of the company, for example, where a director has a family member employed by or connected with a contracting party of the company. It is not enough to simply declare the interest and note the conflict in a board minute. The director must also avoid the conflict, perhaps by not voting on the conflicted matter and abstain from the Board’s discussion. Moreover, a director cannot accept benefits from a third party where it is likely to give rise to a conflict. Such gifts may include anything from hospitality to substantial rewards and for completeness, directors should obtain authority from shareholders before accepting such benefits.  

Directors’ duties apply from the time of appointment and if breached, the company can pursue a civil claim against the director seeking damages or compensation, a requirement to account for profits or assets and restore money or property with interest.

For the most part Directors’ duties cease upon resignation, however there are exceptions, such as the director will continue to owe a duty of confidence to the company and to avoid conflicts of interest. A court has the power to disqualify a director where there is serious concern in respect of their conduct and ability, which means they cannot act for any company nor be involved within the formation or management of a company for a specified timeframe of up to 15 years.

In the event a company becomes insolvent, a director may be held personable liable for the company debts where the director ought to have known there was no reasonable prospect the company could meet its debts when they fell due but continued to trade in any event. Fraudulent trading occurs where a director continues to trade with intent to defraud its creditors and this is an offence that carries a prison sentence. It falls to the liquidator to bring such an action and the court can pierce the corporate veil in these circumstances and require a director to personally contribute to assist with discharging creditors.

To safeguard against any allegation of wrongdoing or breach of duty, directors should ensure that accurate Board minutes are kept of all meetings, to evidence that matters were considered fully and record decisions made at Board level. If they have a concern it should be raised at the earliest opportunity and noted accordingly, as each director has a duty to act with reasonable skill, care and diligence.

Rachel Toner, Solicitor with Worthingtons Solicitors Commercial regularly acts on behalf of companies and directors in corporate matters. If you are a director and require advice please telephone 02890434015 or email RachelToner@worthingtonslaw.co.uk

 

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