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Growing pains: making sureyou stay legal

Directors – Living up to your responsibilities

27 June 2014

Dona Ardeman

Role of DirectorsIntroduction

o Directors’ general duties

o Directors’ conflicts of interest duties

o Shareholders’ claims for breach of directors’ duties

o How can you protect yourself?

o Other statutory responsibilities

o Credit crunch concerns

o Conclusion

Role of directorsDirectors’ general duties

Four statutory general duties:

– To act within powers

– To promote the success of the company for shareholders’ benefit

– To exercise independent judgment

– To exercise reasonable care, skill and diligence

Role of DirectorsDuty to promote success

Duty to promote success of company – the six factors likely consequences of any decision in the long term

interests of the company’s employees

need to foster the company’s business relationships with suppliers, customers and others

impact of the company’s operations on the community and the environment

desirability of maintaining a reputation for high standards of business conduct, and

need to act fairly as between members of the company

Role of DirectorsDuty to promote success

Duty to promote success of company:– What does “success” mean? For commercial

companies - long term increase in value

– Duty subject to requirement to consider or act in interests of company’s creditors

– No guidance on resolution of conflicts between different factors

– Should the company:o buy the cheaper, environmentally less friendly product from overseas

OR the more expensive, greener option that is produced locally?o cut costs by reducing manpower locally OR by relocating its call

centre to a deprived region, creating lots of new jobs in that area

Role of DirectorsDuty to promote success

Recording decisions:

– Greater bureaucracy at board level?

– Not just a box ticking exercise

– Options:o list consideration of six factors for each decision in board minutes?o say nothing & rely on supporting board papers?o take a proportionate approach?o position to date?

• Director acting in good faith not liable for process failure if it would not have affected decision

Role of DirectorsConflicts of Interest

o CA 2006

– s.175 – duty to avoid situation in which director may have interest which may conflict with company’s interests (situational conflicts)

– Uninterested directors can authorise situation provided Articles do not prevent authorisation

Role of DirectorsConflicts of Interest (cont.)

o s.175 CA 2006 – duty to avoid situational conflicts

A Person commercialproperty

company

on board ofmanagement company

rents

Shareholder Director

Role of DirectorsConflicts of Interest (cont.)

o CA 2006

– s.175 – duty to avoid situation in which director may have interest which may conflict with company’s interests (situational conflicts)

o Uninterested directors can authorise situation provided Articles do not prevent authorisation

– s.176 – duty not to accept benefits from third parties

– s.177 (and s.182) – duty to declare nature and extentof interest in proposed (and existing) arrangementswith company

Role of DirectorsConflicts of Interest (cont.)

o s.177 (and s.182) – duty to declare interest in proposed (and existing) arrangements with the company

A Personproperty

company

owns

rents

Shareholder Director

Role of DirectorsConflicts of Interest (cont.)

o s.180(4) CA 2006

– s.175 – 177 CA 2006 not infringed if directors act in accordance with provisions of Articles dealing with conflicts, eg:

o Directors not accountable for benefit derived from authorised situation

o No need to disclose confidential information received in respect of relationship which has been authorised

o Investor Directors will not infringe s.175 – 177 by virtue of fact they may also be an employee, trustee, officer, shareholder etc of an Investor or its investment manager

Role of Directors Shareholders’ claims for breach of director’s duties

o Derivative actions – used to be for the company to bring (difficult)

o Unfair prejudice claim

Role of Directors How to protect yourself? – penalties for breach

Directors’ duties – penalties for breach

– Action may be brought by:o companyo shareholders (derivative claim or unfairly prejudicial conduct action)o insolvency practitioner

– No codification of remedies for breach of directors’ duties

– Civil penalties - save for failure to declare interest in existing transaction / arrangement which may be a criminal offence

– CA 2006 says consequences of breach are “ the same as would apply if the corresponding common law rule or equitable principle applied” (s178(1))

Role of Directors How to protect yourself? – penalties for breach

Directors’ duties – penalties for breach– Remedies for breach of fiduciary duties include:

o injunction (to stop an ongoing breach)o setting aside the transactiono restitution and account of any profits made or other unjust enrichment o damages in respect of any loss sufferedo indemnity for costs or expenses incurred

– Remedy for breach of non fiduciary duty (eg duty of care and skill) = damages

Role of Directors How to protect yourself?

o Indemnity from company

o D&O insurance

o Shareholder ratification

o Proper systems in place

Role of Directors Other issues – other statutory responsibilities

Other statutory responsibilities including:– Statutory returns – Preparation and filing of accounts – Publicity requirements - on company’s business stationary,

website, e-mails and order forms– PLUS:

o Compliance with other laws eg environmental law, Health & Safety, employment law, data protection, defamation, libel and providing misleading information, etc

o Payment of correct amounts of tax, VAT and NI

Role of Directors Credit crunch concerns - directors’ duties when company in financial difficulty

Directors’ duties when company in financial difficulty

– Whilst solvent, directors’ duties are owed to company for benefit of present and future shareholders

– When doubt as to solvency arises (or company becomes insolvent) common law duty (to act in interests of company) and CA 2006 duty (to promote success of company) is redefined

– Directors’ duties are still owed to company but also have to act in interests of creditors with a view to minimising loss to creditors from time to time

– Common law, statutory and regulatory duties are relevant

– Breach may lead to personal liability and possible disqualification

Role of Directors Credit crunch concerns – wrongful and fraudulent trading

Wrongful and fraudulent trading – Wrongful trading

o applies where company gone into insolvent liquidation, therefore retrospective in application o civil claim by liquidator in course of winding-up o personal liability for directors – may be required to make contribution to company’s assets

– Aims to deter directors from continuing to trade where there is no reasonable prospect of company avoiding insolvent liquidation – any kind of act or failure to act (unless it minimises losses to creditors) may attract liability

– Fraudulent trading o applies in circumstances which amount to carrying on business with intent to defraud creditors o potential for civil claim by liquidator o court can order any person concerned to make a contribution to insolvent company’s assets

– Fraudulent trading is also criminal offence

Role of Directors Credit crunch concerns – other issues

Other issues– Section 212 Insolvency Act 1986 – misfeasance

etc – misapplication of company property eg:o transactions at undervalue

o granting preferences

– Disqualification of directors

Role of Directors Credit crunch concerns – some practical considerations

Practical considerations

– Avoid incurring further debts, so far as possible– Hold regular board meetings to review situation, consider as much

up-to-date financial information as possible and document all decisions reached at such meetings

– Seek regular advice from insolvency practitioner/company’s lawyers regarding company’s viability and best way to proceed

– Resigning as director may not be viable option– Check D&O cover for liabilities relating to insolvency and consider

precautionary notification?

Companies Act 2006Where can you go for help?

Further information is available from:

– Mills & Reeve CA 2006 website page at: http://www.mills-reeve.com/companies_act_2006.asp

– Mills & Reeve briefings – What you need to know about the Companies Act 2006

– Mills & Reeve seminars and bespoke training

– Department for Business Innovation and Skills website at http://www.dti.gov.uk/bbf/co-act-2006/index.html

– Companies House website at http://www.companies-house.gov.uk/companiesAct/companiesAct.html

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