The role of a director stands at the helm of a company’s decision-making. And with more than 900,000 new companies being incorporated in the UK last year, the appointment of directors surged. Yet amidst this influx, many newly appointed directors misunderstand their directorial duties. In this article, we look at the role of a director and set out the responsibilities and potential pitfalls that come with the position.
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What are Directors’ Duties?
Directors have several legal obligations that they must uphold, and it can be easy to overlook or misunderstand these.
Directors duties are contained in The Companies Act 2006 and include the duties to: –
1. Act within the director’s powers. I.e. only do what you are allowed to do according to the rules and laws that apply to you as a director. A company’s Articles of Association may set out limits that apply to the powers of its directors / board of directors.
2. Promote the success of the company for the benefit of all members collectively. I.e. work towards making the company successful in a way that benefits all the people involved with it. This includes employees, shareholders and customers.
3. Exercise independent judgement. I.e. make decisions based on your own understanding and opinions, without being influenced by others.
4. Avoid conflicts of interest. I.e. avoid situations where your personal interests (eg. relationships) could interfere with your professional duties (eg. influence your decision making).
5. Not accept benefits from third parties. I.e. you must not take any gifts, favours or other advantages from people or organisations outside of the company.
6. Declare interest in a proposed arrangement or transaction. I.e. openly stating any personal gain or involvement you have in a planned transaction or arrangement.
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What claims can a solvent company bring against a director?
Companies that are financially stable and can pay their debts are considered solvent. When a director breaches their duties, a solvent company can bring a claim against the director.
There are various types of claims a company can bring. The claim brought will depend on the nature of a director’s breach of duty. These claims include: –
* Restitution of Profits – where a director has profited from wrongdoing, such profits must be returned to the company.
* Restoration of Property – where a company regains its property after a director has wrongly taken it. In this instance, ‘property’ refers to any assets of the business, not just land / buildings.
* Injunctive Relief – injunctions can prevent a director committing a breach or continuing to breach their duties.
* Rescission of a Contract – where a contract which conflicts with the company’s policies can be reversed.
* Damages – the company may be entitled to compensation.
* Derivative Claims – where shareholders bring a claim on behalf of the company.
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What claims can an insolvent company bring against a director?
Companies that are unable to pay their debts are considered insolvent. In these circumstances, either a liquidator or administrator of the company could bring a claim on behalf of the company. These claims include:
* Fraudulent Trading – where a director allows a company to incur debt, knowing it won’t be able to repay it.
* Wrongful Trading – where a company is in financial trouble and a director fails to take the necessary steps to reduce the amount of money that the company owes to its creditors. (A creditor is person, company or other organisation which is owed money or has a financial claim against another).
* Director Disqualification – where a director is banned from being involved in the management of companies.
* Misfeasance – where a director acts irresponsibly or improperly in the management of the company’s affairs. These actions may be legal in nature but are executed incorrectly or with negligence leading to negative consequences, such as financial loss or damage.
* Undervalue Transactions: – where a company sells an asset for less than its true value. This implies a director has diverted assets from creditors.
* Preferences: – where a company which is near to insolvency pays a specific creditor (or group of creditors) and this payment places that creditor in a better position than the other creditors.
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How We Can Help
At Bailoran, we understand that most directors act properly and with good intentions. Breaches of directorial duties are often the result of a genuine misunderstanding. However, addressing issues before they become problems nearly always improves the outcome of a situation. So if you have any concerns about your role as a director, taking legal advice as early as possible is key.
We are experienced at dealing with directorial disputes and understand the importance of reaching a timely and cost-effective resolution. By seeking legal advice early on we aim to improve your position.
Please note that this article does not constitute legal advice. If you need any help or further information, please contact us to speak to one of our legal experts:
E: info@bailoransolicitors.com
T: 0113 266 0735.