To be on the board of a company has its attractions, but it also carries a wide range of legal responsibilities, says Christopher Burgon.
Whether you are at the apex of a multi-national corporation, or in a small start-up company, you are equally subject to the law relating to directors.
The benefits and attractions of holding a directorship are obvious. You are at the top of an organisation and part of the decision-making process. You are able to see the big picture and exercise real control and can instigate changes. This can be rewarding both personally and potentially financially, but directors also have responsibilities as well as privileges.
The first is to the company itself. Under the Companies Act 2006, a director has a duty to promote the success of the company and to exercise reasonable care, skill and diligence, while avoiding conflicts of interest and external influence.
These duties are owed to the company and are only enforceable by the company. Instances of a board of directors voting to bring an action against itself are not common, though actions by a new board of directors on behalf of the company against ex-directors are much more frequent. The removal from office of a director requires an ordinary resolution; usually 50% of shareholders.
Even if your co-directors and a majority of the shareholders are satisfied, you could still face an action from any other shareholder on behalf of the company. Any shareholder can bring an action, subject to court approval, against a director for negligence, default, breach of duty or breach of trust. Such an action can predate that shareholder’s membership and can be brought even after a director has retired.
What if the company goes into liquidation and ceases to trade? The Insolvency Act 1986 gives powers to the liquidator/administrator to bring any action against the directors on behalf of the company as if it were still trading. The liquidator/administrator also has wide powers to investigate all of the company’s transactions, going back in some cases to two years before the insolvency, as their primary responsibility is to maximise returns for a company’s creditors. Directors will be asked to personally contribute to assets to be distributed to the creditors, if they have carried on trading when they knew or should have known that the company was insolvent.
There are further hazards a director needs to avoid and obligations with which they need to comply. For example, while a company is a separate legal entity, criminal liability can attach to directors in various circumstances if they are found to have acted “neglectfully” or have “connived” at the offending behavior.
Directors may also find themselves investigated and either prosecuted or fined over acts or omissions. Authorities such as the Companies Investigation Branch (CIB) of the Department for Business have wide investigatory powers that they are not afraid to use.
Other statutory duties are also imposed on directors under legislation as diverse as the Financial Services and Markets Act 2000, the Health and Safety at Work Act 1974, the Environmental Protection Act 1999 and the Insolvency Act 1986. Needless to say, directors can be prosecuted in their own right for criminal offences such as bribery, fraud, insider dealing and price fixing.
While the Corporate Manslaughter and Corporate Homicide Act of 2007 applies to companies and not directors personally, directors can be found personally liable if their gross negligence causes death under a common law offence.
Clearly, then, a directorship has many responsibilities, but with care, diligence, common sense and a certain amount of business acumen there is no reason why any director should fall foul of the law.
Christopher Burgon is a litigation consultant at Saunders Law
