Are you a company director? If so, are you fully aware of your responsibilities and duties to your company? It is common for directors to be completely uninformed of the full extent of their duties, sometimes holding the belief that they can essentially do what they like – particularly if they are also a sole shareholder, which is often the case with SMEs.
What are directors’ duties?
Directors’ duties originated many years ago as a general duty of “good faith” to the company. The Companies Act 2006 codified those duties and now they are enshrined in legislation.
Directors’ duties are designed to protect both the company and its creditors, ensuring that directors are accountable for their actions when managing company affairs. These responsibilities range from exercising reasonable skill and care in relation to the company’s affairs, to promoting the success of the company, to avoiding conflicts of interest, amongst other things.
Why are they so important?
As a director, it is crucial that you make it your business to know what your duties are and who enforces those duties. If you do not, you risk facing some dire consequences including the loss of your:
Failure to comply with your duties in company dealings is actionable by the company’s Liquidator or Administrator. A breach of those duties is not restricted to, for example, simply selling an asset at an undervalue or preferring yourself over other company creditors; those breaches and claims will be at the very core of being a company director.
Take an example
Dave is the director of Widgets Are Us Limited. The company is failing, likely to collapse and enter into an insolvent liquidation, maybe due to Dave’s own instigation or maybe at the instigation of an aggressive creditor via a winding up petition. This is a common scenario that usually follows several predictable key stages:
- In an attempt to resolve the problem, Dave diverts the failing company’s existing order book into a new, debt-free, company. Subsequently, the old company goes into liquidation and the new company commences life, up and running with a full order book.
- Next, the Liquidator of the company reviews the old company’s financial position and immediately spots that work has been diverted to the new company.
- The Liquidator contacts Dave, tells him that the diversion of work is in breach of his duties to the old company and requests a cheque for the value of the work diverted, or worse, he requests that Dave pays him an account of profits.
- Now, not only must Dave write a big cheque for breaching his duties but he may also be at risk of being deemed unfit to be a director which could result in director disqualification proceedings being commenced against him, thereby damaging his career irreparably.
In a nutshell, it’s wise for all directors (including Dave) to know and understand the duties that they owe to their company. If that company is experiencing financial difficulties, the first port of call should always be to take competent and commercial legal insolvency advice.