HOW CAN DIRECTORS PROTECT THEMSELVES FROM PERSONAL LIABILITY FOR BREACH OF DIRECTORS’ DUTIES?
In 2022, 805,141 UK companies were incorporated! Each of these companies is required to have at least one director.
If you are a director, you should be aware that you may be held personally liable for a breach of the duties imposed on you. These can originate from common law, statute or your service contract.
SO, HOW CAN YOU PROTECT YOURSELF?
A good place to start is by being familiar with your statutory directors' duties.
Are you aware of the following key directors’ duties?
1. ACT WITHIN YOUR POWERS
This means that you must act in accordance with the company’s constitution which includes the company’s articles of association, memorandum, shareholder resolutions and any constitutional agreements such as joint venture and shareholder agreements.
You must only exercise your powers for the purposes for which they were granted.
To ensure compliance with this duty, you should make sure that you have access to and have read and understood the key documents listed above.
2. PROMOTE THE SUCCESS OF THE COMPANY
You are required to act in a way that, in your opinion, would be most likely to promote the success of the company.
In order to comply with this duty, you need to understand what ‘success’ means in this context. Although the meaning is somewhat disputed, it is generally accepted that an action which generates a long-term increase in the company’s value will amount to ‘success’.
However, your duty is not simply to make as much money for the company as possible, you also have to consider other factors, including the following:
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; and
the need to act fairly as between members of the company.
It is good practice for any decisions taken by directors to be carefully considered and minuted. If you have sufficient records in place, this can assist in preventing personal liability.
3. EXERCISE INDEPENDENT JUDGEMENT
You are required to make your own decisions based on your knowledge and skill.
Whilst you may wish to take professional advice in relation to certain matters, you cannot rely solely on this to absolve you of any liability. You are still required to exercise your own judgement in deciding whether or not to follow the advice received!
4. EXERCISE REASONABLE CARE, SKILL AND DILIGENCE
Your responsibility and liability under this duty is hinged on the meaning of ‘reasonable’.
To understand what standard of care, skill and diligence constitutes ‘reasonable’, you should consider the following:
the general knowledge, skill and experience that could be expected of a director carrying out the same functions as you within the company; and
the general knowledge, skill and experience that you actually possess.
As the expected standard is measured by reference to both standards set out above, you may not be able to rely on a lack of knowledge, skill or experience to excuse you from liability.
If there is a gap between you and the ‘reasonable’ director, it is advisable that you seek to gain greater knowledge, skill or experience.
5. AVOID CONFLICTS OF INTEREST
You must avoid situations in which you have, or may have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company.
In general, the duty relates to the exploitation of opportunities, real or personal property and/or information.
For example, if you are both a director and a shareholder of a company, during board meetings and whilst undertaking your duties as director, you must act as a director only without regard to your role as a shareholder. Failure to properly distinguish between the two roles and to act within each separately can amount to a conflict of interest.
If you think you have a conflict of interest, you should:
Consider whether it is appropriate to seek approval from the board or the shareholders.
Consider the provisions of the Companies Act 2006 and the company’s articles of associations, which may prescribe the steps required to be undertaken.
Contact FG Solicitors for advice and support.
6. NOT TO ACCEPT BENEFITS FROM THIRD PARTIES
You are not permitted to accept benefits from third parties which are given as a direct result of your role as a director or because you do, or refrain from doing, something as a director.
However, you may accept a benefit if this cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. DECLARE YOUR INTEREST IN PROPOSED TRANSACTIONS OR ARRANGEMENTS WITH THE COMPANY
This duty relates to transactions with the company in which you are in any way directly or indirectly interested. In these circumstances, you would need to declare your interest at any board meeting where the transaction is considered.
If you do not declare your interest, you will not be in breach of the duty if:
your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest;
you were unaware of the interest at the time; or
the other directors were aware of the interest.
WHAT ARE THE CONSEQUENCES OF A BREACH OF YOUR DUTIES?
You may be personally liable for breach of any of your duties and you may be required to:
Reimburse the company for lost profits.
Pay damages to the company.
Give to the company any assets bought with the proceeds of a breach of duty.
In addition, you may be removed from office and/or disqualified from holding further directorships; you could also face criminal penalties, including fines and imprisonment!
HOW CAN YOU PROTECT YOURSELF?
Aside from being aware of your duties and ensuring that you act in accordance with them, you may wish to consider the following protections:
Keeping accurate and thorough records of all decisions taken. This means that if any challenge is raised or a breach of duties claim is brought, you will be able to illustrate the matters taken into account when reaching a decision and this will assist in demonstrating compliance with your duties.
Directors’ and Officers’ Liability Insurance (‘D&O Insurance’)
Your company is able to insure you against any liability that would otherwise attach to you in connection with any negligence, default, breach of duty or breach of trust in relation to the company. This liability would be covered by D & O Insurance.
Whilst it is possible to seek protection through indemnity provisions, generally, any provision within which a company directly or indirectly indemnifies a director, against any liability attaching to them for any negligence, default, breach of duty or breach of trust is void, except in relation to:
some third-party indemnity provisions; and
some pension scheme indemnity provisions.
Power of the Court to Grant Relief
The court may grant relief where you have acted honestly, reasonably, and having regard to all the circumstances of the case, you ought fairly to be excused from liability. This relief may be in full, in part, and on such terms as the court thinks fit.
Ratification or Release by Agreement
Under certain circumstances, the company can ratify (forgive) your negligence, default, breach of duty or breach of trust. However, this will require shareholder approval.
If you are a company director and you think you might be in breach of your duties or if you want to minimise your risk of personal liability, contact FG Solicitors today on 0808 172 93 22 or complete our quick contact form for a no obligation discussion!
We can assist you in understanding your duties, ensuring compliance and managing risk.
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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.