Following our recent seminars at our Uckfield office on the changes in Directors duties legislation we have realised the need for all businesses in Sussex to have access to the correct information so that their directors can be aware of their liabilities.
In October of this year the final tranche of the codification of Directors’ Duties came into effect, under the Companies Act 2006.
Getting things wrong can have a long lasting impact on Directors commercialy and more importantly personally. Some of these issues are:
• Many business director/owners are oblivious to the fact that “limited liability” does not mean the same as “no liability”. When a company faces insolvency, a director or shadow director can be required to contribute towards the debts or liabilities of a company. Any act, or failure to act, that either increases or does not minimise losses to creditors can lead to a liability. The level of a director’s personal contribution will be determined by a court based upon the extent to which the company’s assets have been depleted by the director’s conduct.
• Directors must ask themselves a series of questions in order to satisfy themselves that they have fulfilled their duties.
o The first question is whether you are acting within the powers given to you by the company’s constitution. It isn’t good enough that you have the power, you must only use it for the purposes for which it was conferred.
o The second question is whether you are acting so as to promote the success of the company. In answering this question, there are a series of considerations you need to take into account: the likely consequences of your decision in the long term, the effect your decision will have upon your employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact on the community and environment; the company’s reputation for high standards of business conduct and the need to act fairly as between the shareholders of the company.
• If a company is not able to avoid insolovent liquidation it will be incumbent upon the directors to minimise the potential loss to a company’s creditors and the onus is for them to prove they have done so.
The government has been very clear that the code is not just a box ticking exercise and that the directors of a company will from here on need to show that they are making their decisions in good faith.
Then you must examine whether you have exercised your judgment independently of any interests other than those of the company. That means for example that where a director is appointed by a particular shareholder, when exercising his powers as a director he must do so on the basis of what is best for the whole company and not just what is best for the shareholder for whom he was appointed.
The next step is to ensure that in reaching decisions you act with reasonable skill and care, avoid conflicts of interest and make a thorough declaration of any interest you might have in a proposed transaction. The final duty is not to accept benefits from third parties but you will be pleased to note that this doesn’t go so far as to mean that you can’t accept the occasional bottle of port this festive season!
With the economy in distress and a more demanding rule book for company directors, the most important message we can get across to company directors here in Sussex is to think through your decisions carefully and in doing so keep a thorough record, not only of the decision itself, but your reasoning and thought process in getting there.