Director duties and some common business mistakes

Directors are persons in position of trust on behalf of the company’s shareholders. Their main duty is to ensure that the company is effectively managed for the benefit of all of its members. Additionally, the prime duty is reinforced and supported by a number of statutory duties contained in sections 172-177 of the Companies Act 2006. There are also a number of other regulations applicable to directors. In this article we will focus on the main statutory and non-statutory directors’ responsibilities and the most common ways in which directors can abuse their obligations, but legal advice is always worth taking – if nothing else, according to Sess Sigre an expert in business law at Turbervilles law firm, obtaining advice shows that a director has not simply acted without thought of consequence. Taking advice therefore adds a layer of extra protection. Another alternative is for a director to seek an indemnity from the company for difficult decisions.

Directors’ Statutory Responsibilities

  1. 1.       Duty to promote the success of the company

Directors must act in good faith and give consideration to shareholders’ best interest when making decisions. In managing the affairs of the company the directors must think of likely long-term consequences of their decisions, interest of those employed by the company, good relationships with the company’s clients and suppliers, reputation of the business and company’s impact on local community and environment.

  1. 2.       Duty to exercise independent judgment

Directors must remain impartial at all times and acting on third party’s instructions will usually result in breach of this rule.

  1. 3.       To act within authority

Directors should never exceed their authority and always act within the powers given to them by the shareholders.

  1. 4.       To exercise reasonable care, skill and diligence

Directors must exercise their duties with certain degree of skill and care. Those with professional qualifications will be expected to use their special skills or knowledge.

  1. 5.       Avoiding conflicts of interest

Directors should avoid both apparent and potential conflicts of interest. The directors should disclose conflict of interest to the board before acting. Under the legislation the board may at its discretion allow the director to continue to act in the matter despite the conflict of interest.

  1. 6.       Not to get bribed

Directors shall not accept any benefits that could impact on their ability to act impartially and in the best interest of the company. Benefits can be both of monetary and non-monetary value.

  1. 7.       Declaration of interest in proposed transaction or agreement

If the director is likely to benefit from a proposed transaction or contract he or she should immediately disclose their interest to the board. This also covers indirect benefits through persons related to the director. Therefore, if a wife of the director is likely to benefit from a proposed transaction the interest in the transaction should be disclosed.

Most common practical mistakes

  1. Many start-ups begin with two partners. It is quite common for the partners to split their shares 50/50. Although this may create a fair profit split, it leads to a dead-end situation when it comes to decision-making as when two partners disagree with each other none of them can make a decision.
  2. Another common mistake made by directors is to withdraw money from the company without a proper paper trail in the form of director’s contract of service or shareholders’ resolution authorising such withdrawal. Although, this may not be a problem in the case of ‘one-man’ companies it can lead to difficulties if more than one person is involved.
  3. Many businesses try to ‘save’ on tax and NI contributions by using self-employed workers. Unfortunately, most of these companies do not have proper contractual agreements such as NDAs to protect themselves against the self-employed persons stealing their customer base, business ideas or know-how. Also, if the self-employed workers are ‘integrated’ into your business to the same extent as your actual employees you could end up being fined and paying more tax than if you had employed them in the first place.
  4. With the growing amount of eCommerce businesses there is a reckless trend to copy and paste competitors standard terms and conditions. In 99.9% of situation you will find that the competitor has done the same and you will end up with a situation that is not covered by the terms and conditions. This can ultimately cost you more than having them drafted properly to fit your business model.