Phil Harris, Senior Manager at FRP Advisory LLP
It is not uncommon for directors to find themselves “wearing several hats” when dealing with the company’s affairs. Regardless of size of business or its sector, directors can also be shareholders, employees, creditors or debtors of the business.
What are a directors’ duties?
Directors’ duties are a series of statutory, common law and equitable obligations owed to the company. Directors are expected to act in good faith and in the best interests of the company. The Companies Act 2006 defines the seven statutory powers and duties as follows;
- Act within powers;
- Promote the success of the company;
- Exercise independent judgment;
- Exercise reasonable care, skill and diligence;
- Avoid conflicts of interest;
- Not to accept benefits from third parties; and
- Declare interest in proposed transaction or arrangement.
Other duties and powers are defined in the company’s articles of association and can be specific to the company. In addition, other responsibilities are imposed by the health and safety, environmental and insolvency legislation.
What can happen if a director breaches those duties?
If a director breaches his duties it is the company that brings any action, unless the company is insolvent in which case the liquidator/administrator may bring the action as agent of the company.
Directors can find themselves unwittingly in breach of their duties if the company is loss making as their duty of care is now owed to the company’s creditors. Remedies include seeking an injunction or claims for damages and/or compensation. Certain breaches can also result in criminal proceedings and personal liability.
How can directors protect themselves?
Directors should ensure they regularly review the company’s financial position and minute key decisions in the company’s statutory books, especially if the company is distressed. Independent professional advice should be sought at the earliest opportunity.