In a jurisdiction with a growing claims culture and increasing regulatory burden, the threat of litigation is just as relevant to directors as to corporate entities themselves. Whilst companies and partnerships may have limited liability, the liabilities of directors themselves must not be overlooked. In this article we remind directors in the hospitality sector of their duties, highlighting key points, potential risks and identifying ways to manage these risks.
General duties of directors under the Companies Act 2006
The Companies Act 2006 codified certain common law and equitable duties of directors. These general duties are owed by a director, in his capacity as a director, to the company. Only the company, or, in some circumstances, the shareholders acting on the company’s behalf, will be able to enforce them. Any person holding the position of director, whatever they are called, are subject to these duties. Shadow directors are also subject to these duties where the corresponding common law rules or equitable principles apply. However, The Small Business, Enterprise and Employment Act 2015 expands the application of these duties to shadow directors “where and to the extent that they are capable of applying”.
In summary, the seven general directors’ duties under the Companies Act are:
- To act within powers
- To promote the success of the company
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare an interest in a proposed transaction or arrangement
Duty to promote the success of the company
In complying with their duty to promote the success of the company, a director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole. In carrying out this duty, directors must have regard to: the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; the need to act fairly as between the members of the company.
Directors in the hospitality sector can often be faced with decisions which may impact the company’s operations on the community and the environment, and this is an important factor to consider when deciding whether an action would promote the success of the company as a whole.
A company should consider its policy and determine how compliance with this duty is documented. A carefully considered and drafted policy may assist in rebutting any allegation that the factors to which directors must have regard have not properly been considered.
Duty to exercise reasonable care, skill and diligence
One important point to note in terms of the duty to exercise reasonable care, skill and diligence is that the standard is judged by both an objective and subjective test. A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions of the director in relation to the company. Additionally, where a director has specialist knowledge, the higher standard must be met whereby they must exercise the care, skill and diligence with the knowledge, skill and experience they actually have.
Duty to not accept benefits from third parties
The very nature of the hospitality sector gives rise to the risks of bribery or exploitation of the position of director for personal benefit. Directors have a duty to not accept any benefit from a third party which is conferred because of them being a director or them doing or not doing anything as a director.
The members of a company may authorise the acceptance of benefits that would otherwise be a breach of this duty. It may be appropriate for companies to amend their constitutions enabling directors to accept a certain level of corporate hospitality without breaching their duty to the company.
On a similar note, the Bribery Act 2010 should also be of concern to directors, as it created criminal offences for bribing another person and relating to being bribed. Directors should be aware of these offences and how to avoid them.
Other statutory duties
As well as the general duties, the Companies Act imposes administrative duties on directors such as the duty to file annual returns and keep the statutory books up to date.
Directors should also be mindful of the wide range of other laws and regulations which also impose duties on them such as insolvency law, company and commercial governance, health and safety regulations, insurance compliance, environmental and planning legislation and competition law.
For those in the hospitality sector, specific risk areas are likely to include health and safety, accident and property damage, food safety and hygiene, licensing, intellectual property and brand management, employment, immigration, data protection, pensions, financial crime and cyber security. It is important that directors are aware of their duties in relation to these areas in order to avoid risk of personal liability.
There are several steps that a company can take to reduce the risk of action against its directors in relation to their personal duties.
The Companies Act permits a company to purchase insurance for its directors against any liability for breach of duty. Secondly, although the company cannot exempt a director for liability, it may indemnify the director against defence costs, or costs incurred in an application for relief. However, if the director is unsuccessful he may find himself having to repay these costs.
Companies should ensure that its directors are briefed on their duties and that they are referred to in any terms of appointment and description of role, and any terms of reference of any board or committee.
Policies in areas such as finance, human resources, ethics, compliance and corporate responsibility should be carefully drafted considering directors’ duties and widely distributed. Policies need to be readily accessible, kept up to date and must also be replaced or supplemented where necessary to ensure that national and local regulatory requirements are met.
Directors are advised to keep matters under continual review. In particular, it is prudent to:
- Hold frequent board meetings and to keep proper minutes of those meetings, noting in particular any decisions made and the reasons for them
- Maintain accurate and up to date financial and other records
- Take professional advice where required
- Have a corporate culture that allows people to report appropriately
- Identify specific risks to the business
- Consider and implement protective steps
- Put in place appropriate staff training and education
Having these policies in place and directors who are well informed of their duties and responsibilities are an important part of avoiding any wrongdoing and preparing a company or director for any investigation they may face.