Many become directors for one reason and one reason only – to save on their tax bill via the ‘salary/dividend’ method.
What many owner-directors might not appreciate is that the role requires them to undertake specific legal duties; the penalties for non-compliance can be severe to include possible criminal proceedings.
This checklist is intended to form the basis of a list that can be given to all directors for their reference.
• Prime Duty
Directors hold a position of trust on behalf of the company’s shareholders. Their prime duty is to manage the company for the benefit of those shareholders and not for any individual shareholder or group of shareholders.
• Statutory Duties
As with many UK legal rules the duties owed by directors derive from Common Law having evolved as a result of different rulings, comments and decisions made in Court Cases over the years. The Companies Act 2006 ‘codified’ (brought together) some of those rulings with particular relevance to ‘conflicts of interest’ such that there are now seven statutory duties as follows: S172 – s177 Companies Act 2006.
1. To act within the powers conferred as per the company’s articles
The usual example given of abuse of this duty concerns the issue of shares. The issuing of shares in order to raise money for the entire company is acceptable but not if for any other purpose e.g to increase the number of shares to benefit one particular director.
SUGGESTION: Directors should provide the company with written confirmation that they have read the company’s articles to enable them ‘to act within its powers’.
2. To promote the success of the company
Directors must act in a way which they consider, in good faith, will promote the success of the company for the benefit of all shareholders, having regard to:
(a) the likely long term consequences of any decision
(b) the interests of the company‘s employees
(c) the need to foster the company‘s business relationships with suppliers, customers and others
(d) the impact of the company‘s operations on the community and the environment
(e) the need to maintain a reputation of high standards of business conduct and to act fairly as between shareholders
3. To exercise independent judgement
This duty is the overall method of decision-making that hopefully will alleviate any conflict of interest.
4. To exercise reasonable care, skill and diligence
The standard is the usual standard exercised by a diligent person; higher standards are expected from directors responsible for decisions on matters for which they have specialist or professional knowledge.
5. To avoid conflicts of interest
This duty is particularly relevant in any property, information or opportunity transaction. A director cannot have a direct or even indirect interest that conflicts or may potentially conflict with the interests of the company. Such transactions can be actioned but need to be authorised by the non-conflicted directors on the board subject to the necessary quorum for a directors meeting excluding the director with the conflict of interest; that director is not allowed to vote on the transaction. Such a conflict may be encountered by non-executive directors who are more likely to hold multiple directorships.
6. To not accept benefits from third parties
Conflict of interest may arise on the acceptance of a benefit given by virtue of the directorship. ‘Benefits’ can be monetary or non-monetary in nature. This does, however, bring into question as to how far to take the acceptance of corporate hospitality.
SUGGESTION: Should guidelines be introduced by the company to disclose gifts above a certain amount?
7. To declare interests in any proposed transaction or arrangement
This duty requires the declaration of any interest – note: NOT only in a situation where a ‘conflict’ may arise but any interest of a director or any person connected with the director, for example, his/her spouse/ children. The nature and extent of the interest must be declared to the other directors unless they are already aware or ‘ought reasonably to be aware’ of the interest. Chapter 3 Companies Act 2006 covers declaration of existing transactions or arrangements; failure to declare can result in a fine.
SUGGESTION: It should at least be noted in minutes or board papers that these statutory duties have been considered by each director.
Other legal duties
There are laws that give right of prosecution against directors in their personal capacity for certain actions undertaken whilst fulfilling that role, for example:
• Directors of companies that fail to prepare and deliver documents, on behalf of the company, to Companies House as and when required by the Companies Act. Conviction could result in a criminal record for each director and a Level 5 fine of £5,000. s387; s 858 Companies Act 2006
• Shareholders are allowed to bring legal action on behalf of the company against any director who is personally liable for any loss suffered by the company due to the ‘negligence, default of duty or breach of trust by the director’. Part 11 Companies Act 2006 – Derivative action. SUGGESTION: Although the likelihood of a claim being successful is limited should indemnity insurance be considered?
• The Insolvency Act 1986 allows proceedings to be brought against the company’s directors if they knew or ought to have known that the company was insolvent or the company was trading fraudulently with intent to defraud creditors. The directors may be ordered to make such contribution to the company’s assets as the court thinks fit.
• The Health and Safety at Work Act 1974 s37 imposes liability if a health and safety offence is committed with the knowledge or ‘connivance’ of a director
• Laws relating to the control and disposal of hazardous waste
• The UK Enterprise Act 2002 imposes personal liability on directors for breaches of competition rules