Codification of Director’s Duties
Written by 07th September 2014on
The increased focus on corporate governance, and the development of corporate governance regimes generally, has placed an even greater spotlight on directors to ensure that they closely adhere to their duties and obligations.
There are severe consequences for directors who have not taken their duties seriously and have not carried out their duties to the best of their ability, which may result in them being found personally liable and subject to civil or criminal sanctions.
Part 5 of the Companies Act 2014 (the Act) consolidates the duties and responsibilities of directors in in one unified code for clarity and transparency.
Who will the regime apply to?
The new regime will apply to all directors, including those that have been formally appointed, de facto directors (a common law concept now given legislative recognition under the Act), shadow directors and secretaries. Secretaries are also dealt with in the Act but they are not subject to the same duties as directors, reflecting the fact that their duties are those that have been delegated by the board of directors.
Main fiduciary duties of a director
When the Act is commenced it will have a significant impact on company law. For the first time, the Act lists the eight main fiduciary duties of directors in one place and these are listed below:
- to act in good faith, in what the director considers to be the best interests of the company.
- to act honestly and responsibly in relation to the company's affairs.
- to act in accordance with the company's constitution and to exercise powers only for lawful purposes.
- not to use company property for their own or others' personal gain unless approved by the company's members or agreed to in the company's constitution.
- not to fetter discretion unless permitted by the company's constitution or entered into in the company's interests.
- to avoid conflicts of interest.
- to exercise care, skill and diligence.
- to have regard to the interests of the company's members.
The last point will be particularly relevant to directors who are shareholders themselves, or who may have been appointed to look after a shareholder, or a group of shareholders' interests, under the constitution of the company or a shareholders' agreement. They will have to act in the interests of the shareholder group as a whole and not simply their own or that of the shareholder who appointed them.
General duties of directors
The Act also includes a number of general duties for directors.
- Directors must ensure compliance with the Companies Act and the various tax acts.
- Directors must ensure that the company secretary is suitably qualified.
- Directors must acknowledge the existence of their duties by signing a declaration to that effect.
- Directors must take into account the interests of the members of the company and have regard to the interests of the employees.
- Restrictions on loans, quasi loans, credit transactions and certain guarantees and security exist for directors, but will be subject to the new summary approval procedure.
- Directors must disclose any interests in contracts made by the company.
- Directors must notify the company of any interests in shares in the company, its parent or subsidiary but no obligation arises if the shares held represent less than 1% of the share capital of the company or the shares do not have voting rights.
Directors who are found to be in breach of their duties will be liable to account for any gains accrued and must indemnify companies for losses resulting from any breaches of duties. A court may grant relief from liability where it is satisfied that a director acted honestly and reasonably at all times.
The Act sees the reintroduction of the compliance statement: directors of companies, who meet certain thresholds, will be required to produce a compliance statement confirming compliance with company law and tax law for inclusion in the directors' report. This requirement will only apply to the larger private companies or publicly-quoted companies and we will be in contact with those clients that are caught by these provisions.
The Companies Act 2014 is expected to come into force on 1 June 2015. The codification of directors' duties in one place will greatly assist directors in identifying what is required of them. If you require any further information regarding this matter please let us know and we would be happy to assist you in interpreting these requirements.