Directorship is not a status…..
Directorship is not a Status – it is a responsibility!
There are many things that you start doing when you turn 16 such as consuming alcohol that has been bought for you by someone over the age of 18. Perhaps more pertinently to this article you can at your 16th birthday become a director of a Company registered in England and Wales. Many will tell you of the pitfalls of alcohol consumption, but few know enough information about the impact of becoming a company director to give meaningful advice.
‘Directors… …occupy a fiduciary position towards the company whose board they form’.
Lord Porter in Regal (Hastings) v Gullier (1942),
“the distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”
P D Finn ‘Fiduciary Obligations’
This last statement seems very close to the current codified position in the Companies Act 2006 which is set out below: –
Section 171 to act within their powers
Section 172 to promote the success of the company
Section 173 to exercise independent judgement
section 174 to exercise reasonable care, skill and diligence
section 175 to avoid conflict of interests
section 176 not to accept benefits from third parties
section 177 to declare an interest in a proposed transaction with the company
The rules in relation to each of these duties have been developed over the last 150 years or so through common law, decisions by judges on specific facts where Parliament had given no direction. Despite the codification in 1985 and then in 2006 the courts have in general held to the view that the common law remains and that they will continue to enforce it under the new headings.
If a director breaches these obligations, they can be sued by the company, either at the instigation of the directors or shareholders, or investigated by the Insolvency Service or a liquidator in the event of an insolvency situation.
It should be remembered that the Director should always act with the interests of the Company in mind and where the Company is solvent through the eyes of a members but where the Company is insolvent or is potentially likely to be so through the eyes of the creditors. The last part added to by the Insolvency Act 1986 suggests that where a company is insolvent the directors should take steps to prevent trading especially where that might increase the exposure of creditors.
In addition, it should be remembered that there are certain administrative duties imposed on directors where failure to comply can also lead to potential liability. For instance, the directors of a company are tasked with maintaining certain forms at Companies House. A failure to do so within a prescribed period could lead to a criminal penalty against the director.
Finally, It is important to note that where there is a breach of duty the impact could be both Civil or Criminal. So, it is imperative that any person who is thinking of taking on a directorship of a company or who is transferring their business into a limited company or limited liability partnership vehicle seek advice on the responsibilities prior to the appointment or transfer of the business whichever is the case.
I am a Corporate Finance and Restructuring lawyer within the Commercial Services team at Thomson Webb & Corfield in Cambridge.
Friday, 03 January 2020
Solicitor – Thomson Webb & Corfield