LEGAL ADVICE FOR DIRECTORS

Although companies are legal entities they can only act through human agents. Company directors fulfil this role and the operation and management of the company is typically delegated to them. The directors’ powers to manage the company are normally governed by the company’s articles of association and any restrictions that may be contained therein.

Directors exercise their powers principally through the board of directors. The board will meet periodically to consider matters relating to the management of the company and will make its decisions collectively through resolutions. In most small companies with few directors the day to day decisions can be taken at meetings of all the directors, board meetings of larger companies are relatively infrequent and are generally used to discuss and formulate policy or to approve and authorize important transactions.

Certain statutory, fiduciary, and common law duties are imposed on directors to safeguard the rights of shareholders and third parties. The seven main duties include:

• Duty to act within their powers. A director must act in accordance with the company’s constitution and exercise their powers only for the purposes for which they were granted. Most of the director’s powers and their restrictions are contained in a company’s articles of association.
• Duty to promote the success of the company. A director must act in a manner they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
• Duty to exercise independent judgment. A director must exercise their own judgment in performing their role and should not act in the interests of any individual or group.
• Duty to exercise reasonable care, skill, and judgment. A director must exercise reasonable care, skill, and diligence in their role using their own general knowledge, skill, and experience together with the care, skill, and diligence that may reasonably be expected of a person who is carrying out the functions of a director. This duty imposes both subjective and objective standards.
• Duty to avoid conflict of interests. A director must avoid any situation where they have or could have a conflict or possible conflict of interest with those of the company.
• Duty not to accept benefits from third parties. A director must not accept benefits from third parties that have arisen because of their directorship or their acts or omissions as a director.
• Duty to declare interests in proposed or existing transactions or arrangements. A director must declare to the board the nature and extent of any interest they have in a transaction or arrangement with the company, whether directly or indirectly.

Under the Company Directors Disqualification Act 1986 directors can be disqualified from being a company director if they don’t meet their legal responsibilities. At Birch Law we have experience acting for directors that have been or are facing a disqualification order. We can assist with applications to the court for permission to remain a director despite a formal disqualification order or undertaking (otherwise known as a Section 17 application).

Directors of companies in financial difficulties face additional issues and directors of insolvent companies may be found liable for fraudulent or wrongful trading. Where a company is facing financial difficulties, directors should seek independent legal advice as soon possible if they are to avoid potential personal liability. Directors can be liable for fraudulent or wrongful trading if the company continues trading when insolvent and the interests of creditors are prejudiced. Notably where a company is insolvent or approaching insolvency, the general duty to promote the success of the company is modified so that a director must instead act in the best interests of the company’s creditors.

Fraudulent trading occurs if, in the course of winding up, it appears that any business of the company has been carried on with intent to defraud creditors or for any other fraudulent purpose. In such cases, the liquidator can seek a court declaration that anyone who was knowingly party to the fraudulent business should contribute to the company’s assets.

Directors of an insolvent company may be found liable for wrongful trading if it is established that, at a time before the company went into insolvent liquidation, the director knew or ought to have concluded that there was reasonable prospect of the company becoming insolvent and they allowed the company to continue incurring liabilities.

The Insolvency Service’s powers have been extended to investigate and disqualify former directors who have dissolved companies to avoid paying their liabilities, including evading repayment of Government backed loans put in place to support businesses during the Covid-19 pandemic. If misconduct is found, former directors may face disqualification for up to 15 years and prosecution in the most serious cases.