Company directors: the role doesn’t come with a handbook

In the first of a series of articles on disputes within businesses, Kelly Dickman looks at common issues faced by new – and experienced – company directors.

To be the director of a company is no small thing, it is to be the guardian of an entity that cannot act for itself. By taking on the role of a director, you are agreeing to act in the best interests of the company over and above your own.

Many directors I have advised have taken on the role without understanding the duties and responsibilities, as well as their rights. They may  see incorporating their business and becoming a director as a logical next step, or perhaps they have been guided to this path by advisors extolling the potential financial benefits.  , Whatever the reason there is very little guidance on what that means for you in practical terms. There are of course several excellent bodies and organisations a director can chose to become a member of, which can offer help and guidance, but there is no mandatory training or courses, nor is there any regulatory body to maintain standards and provide clear universal guidance on your role. This is in sharp contrast with most other professional roles, such as lawyers, accountants etc. Yet the role of director has equally weighty obligations as these professions, particularly considering the fiduciary duties a director owes to their company and the statutory protections provided to companies by such laws as the Companies Act 2006.

This leaves many directors without a clear understanding of their duties and obligations to their companies until they are embroiled in a legal dispute, which is when they discover some assumptions they have made are not quite the way the law looks at things.

Director’s duties

As a director, you are the key decision maker  for the company – for example you can instruct professional legal advisers or accountants; you can bind the company to contracts, and you can decide the direction the company moves in, from the day-to-day management to the big expansion decisions.

The directors must acknowledge the concerns of the shareholders and fulfil any shareholder resolutions, but ultimately it is the directors who run the company.

protect the company, and have the right to commence legal action on behalf of the company to protect its intellectual property (IP), copyrights, and  everything else from breach of suppliers’ agreements to other directors who breach their duties.

The Companies Act 2006 outlines the duties of a director in detail. Broadly speaking, they can be narrowed down to these key principles:

• To act within your powers (section 171).
• To promote the success of the company (section 172).
• To exercise independent judgment (section 173).
• To exercise reasonable care, skill and diligence in relation to the management of a company (section 174).
• To avoid conflicts (or possible conflicts) of interest (section 175).
• Not to accept benefits from third parties in your capacity as director (section 176).
• To declare any interest in a proposed or existing transaction or arrangement with the company (section 177).

So a good director is looking out for the best interests of their company and exercising reasonable care and skill in their management of it (points (a) to(d)), so far so good. Nothing different to what you’ve been doing before.

Management and co-directors

Points (e) to (g) are where things get a little more complicated, especially for small companies and newly incorporated companies that have been fully functional trading businesses for years prior to incorporation. Companies as opposed to other types of businesses, require board meeting and minutes to document all significant decisions and this can be a large adjustment for new directors who are unused to the formality and rigidity of conducting business on behalf of a company. The board minutes are also where conflicts are noted and interests in transactions etc are recorded. This all becomes particularly relevant when there is a legal dispute and allegations of misconduct arise, as board minutes or the lack of them, can be instrumental in proving or disproving such allegations.

It is also worth noting that a common division of labour between directors is to have one director solely in charge of finances, and whilst this is not inherently a problem, all directors have the right to access all of the company’s financial information. In fact it is vital that all directors do, in order to comply with their responsibilities to exercise independent judgment, exercise reasonable care and skill, promote the success of the company and their duty to keep and file accurate accounts under the Companies Act. Each director needs to keep in mind their own duties to the company and be confident that they are meeting each of those responsibilities themselves without relying too heavily on their fellow directors meeting it for them. Again, a common legal dispute between directors is when one or more are ‘frozen out’ of aspects of their statutory role.

If you have a dispute within your business that needs resolving, get in touch with our Dispute Resolution team. Our legal experts can also advise on company structuring, contracts and employer issues.