Many company directors are delighted to learn that limited companies are separate legal entities; therefore they are not responsible for any company debts in the event of insolvency.
However, this does not really tell the whole story!
While a limited company will be a separate legal entity, company directors do not have infinite scope to do as they like without repercussions.
We will come on to the potential consequences of a breach shortly, but first it is important to understand what duties a director has.
Companies Act 2006
The Companies Act 2006 codifies earlier law in this area and listed seven key company director responsibilities:
- To act within powers
A company director must always act within the powers set out in the company’s constitution. On a day-to-day basis, this means company directors should be familiar with the company articles and the procedures for decision making. Company directors may only exercise those powers for the purposes for which they were conferred.
- To promote the success of the company
When making corporate decisions for the company, a company director must consider the likely long-term consequences and how they will affect the interests of the business, its employees and the members as a whole.
- To exercise independent judgement
A company director must make decisions on behalf of the company, independent of any other person’s input on the matter.
- To exercise reasonable care, skill and diligence
This means company directors must exercise such care, skill and diligence that would be exercised by a reasonable, diligent person. Furthermore, if any company director has a particular skill set (e.g. they are an accountant), they are held to a higher standard as they have a particular skill set.
- To avoid conflicts of interest
All company directors must avoid a situation in which they have, or could have, a conflict between their personal interests and those of the company. For example, a company director may not take a contract with a company client for his own personal gain without making sure the relevant consents within the company's Articles have been approved. Any profits made from doing so must be returned to the company, unless express authority is given to the company director.
- Not to accept benefits from third parties
A company director must not accept a bribe from any third party designed to induce him or her to do (or omit doing) something. This duty is designed to maintain the integrity of the company by preventing a company director from accepting bribes, but it also steers company directors away from a potential conflict of interest.
- To declare an interest in a proposed transaction or arrangement
This duty goes hand in hand with duties 3 and 5 above. A company director must express the nature and extent of their personal interest in any proposed transaction, typically done by giving a notice at a board meeting of the corporate directors. Note that this step is unnecessary if:
a) the company director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest;
b) the interest is so obvious that the other company directors would already be aware;
c) the interested company director is unaware of their interest.
However, in the interests of good corporate governance, it is always wise for any declaration to be formally recorded.
Day-to-day director responsibilities
In addition to the seven duties listed above, a director’s responsibilities will also have a number of day-to-day responsibilities.
These include maintaining the confidentiality of the company’s matters, complying with statutory regulations such as health and safety laws and insolvency practices, and the maintenance of some administrative tasks, such as delivering the accounts and maintaining the following registers:
- A register of directors
- A register of shareholders
- A register of people with significant control
- A register of debenture holders
It is common for company directors to appoint a company secretary and delegate a number of the administrative duties, but this is no longer a requirement.
When do directors' duties end?
A company director’s duties begin when they become a company director.
Many company directors believe that all duties owed to a company end the moment they resign, but there are three notable exceptions:
- The duty to keep company matters confidential will apply after a company director has left office
- A company director must not accept benefits from third parties for things done, or not done whilst they were a company director
- A company director must continue to avoid conflicts of interest, specifically in respect of any information, opportunity or property which a company director became aware of whilst they were in office
It is therefore important for any company director resigning from the company (especially on bad terms) to be mindful of their continuing duties.
Breach of duty
There are a number of different consequences that could arise from breaching the duties set out above.
Possible consequences include:
- An action by the company
The company may sue the former company director for an act or omission involving negligence or breach of duty. The company director does not need to have gained a personal benefit from the breach. The Courts can award damages, restitution of profits, rescission of a contract, restoration of property or injunctive relief depending on the extent and nature of the breach.
- Contribution for wrongful trading
In the event a company becomes insolvent, a liquidator or administrator may bring a claim against a company director who continued to trade where insolvency was a reasonable prospect, asking the court to order that a company director contributes to the company’s assets.
This may also occur where a director carries out transactions at an undervalue (for instance, selling company property for significantly less than market value) or where a director gives preference to one creditor (or a class of creditors) over another. In these circumstances, a defence may be available to a director who took steps to minimise the loss to the company’s creditors.
An Insolvency Practitioner can submit a report to the court if a company director’s conduct leading to the insolvency left them ‘unfit to be concerned in the management of a company’. In this situation, a court may disqualify the director for up to 15 years. In 2013, there were 1273 disqualifications, with the average length being 6 years.
- Personal Liability
In context of corporate manslaughter, if a company director’s conduct is deemed to be gross negligence, personal criminal liability can attach in the form of gross negligence manslaughter.
Key points to remember
- A company director’s duties are not only owed to the company’s members, but the company’s creditors
- Duties owed to the company do not necessarily end on resignation
- Incorporating a simple business does not fully protect those in control from personal liability in all circumstances
Our Corporate team regularly provides advice to both current and prospective company directors in relation to their powers and responsibilities. For more information please contact Matthew Collings here.