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Directors' duties.

Introduction

This checklist provides a quick and easy guide to the main duties of company directors, which apply equally to non-executive directors. Most of the duties, which are many and varied, are statutory. This means that they are a legal requirement, and that failure to carry out some of the more important of these may incur a penalty. Legislative changes that could affect the explanations given below may be coming into force during 2006. If there is any doubt, seek professional advice.

National Occupational Standards for Management and Leadership

This checklist has relevance for the following standards: B: Providing direction, unit 8

Definition

This Checklist outlines directors duties and the protections afforded to company directors by current legislation, by common law, and by custom and practice.

Members are the people who are entitled to vote at general meetings and ultimately control the company. They may be shareholders, but "members" is the correct term. Not all companies have share capital and shareholders.

The sources of directors' duties

(NB. The masculine form is used throughout to refer to both men and women.)

Directors' duties are not codified in a single place and are therefore relatively difficult to check and explain. The following are the main sources of their duties:

* The Companies Act 1985 (as amended)

This is the principal Act relating to companies and company directors. Some of its provisions are absolute, and some apply unless they are overridden by individual company articles.

* Other statutory law

An example is the Health and Safety at Work etc. Act.

* Company articles

All companies must adopt articles. Regulations issued in conjunction with the Companies Acts form model sets of articles which individual companies may adopt them, reject them or amend. For a company limited by shares it is Table A, and for a company limited by guarantee it is Table C. The appropriate table is deemed to apply to the extent that it has not been excluded. Company articles are always very important and significantly affect the duties of directors. A wide range of possibilities may be encountered. Company articles cannot, of course, override statutory law.

* Common law

This is judge-made case law built up over a long period

* Custom and practice.

This ranks behind the above sources, but may have some validity.

* The Combined Code

Issued in 1998 by the London Stock Exchange, the Combined Code comprises the Principles of Good Governance and Code of Best Practice. The Code is based on earlier recommendations of the Cadbury, Greenbury and Hampel reports on corporate governance and directors' remuneration.

The Code does not have the force of law but it has been adopted by the London Stock Exchange for listed companies. Some of its provisions relate to the duties of directors.

Action checklist

1. Who incurs the duties and obligations of a company director?

This may not be as obvious as one might think. All directors should, of course, be properly appointed in accordance with the provisions of the Companies Act and company articles, and most directors are so appointed. However, the Companies Act defines a director as:

'any person occupying the position of a director, by whatever name called'.

A person may be a director, and take on the duties of being a director, without having been formally appointed to the position and possibly without realising it.

It is possible for a company, although not strictly a person, to be a director of another company.

2. To whom and what are the duties and obligations of a company director owed?

Many of a director's duties are owed to the company itself, which in practice means to the members of the company. Examples are the duty of care and the fiduciary duty. Strictly speaking the duty is to the company of which he is a director and not to other group companies. There is normally no conflict, but group companies may, for example, have different minority interests and different employees. The duty is to the company as a whole and a director should not give undue preference to one section (for example to a particular type of shareholder).

Directors have many duties to the state. They include complying with all laws and running companies honestly. In particular directors must ensure that the statutory records are properly maintained, that all necessary information is given to the Registrar of Companies at Companies House and that proper accounts are prepared, signed and delivered.

Directors have many duties to employees, suppliers and the general public. These may be common law duties or may arise from such legislation as the Heath and Safety at Work Act, the Data Protection Act and from employment legislation.

3. The register of directors and secretaries

A company is required by law to record in its register of directors and secretaries personal details of each director. The same information must be reported to Companies House within 14 days of the appointment, and any change in the information must be reported to Companies House within 14 days of the change. Each director has a statutory duty to provide (and keep up to date) the following information:

* Surname and forenames and any former surnames and forenames used in the previous 20 years. Married women need not disclose their maiden surnames, and names used only before the age of 18 need not be disclosed

* Usual residential address

* Nationality

* Business occupation

* Details of other directorships held currently and held within the preceding five years. Other group companies and companies dormant at all relevant times need not be disclosed.

4. The register of directors' interests in share and debentures

Each director is required by law to provide to the company details of his holdings in shares and debentures and all his rights and options to subscribe for shares and debentures. This applies to holdings, rights and options in any group company, not just the company in question. Each director must (so long as he has the knowledge) provide the same information for holdings, rights, and options held by his spouse and children up to the age of eighteen. Beneficial interests must be reported and not just shares held in the director's own name.

The information must be provided within five days of appointment as a director, and any change must be reported within five days of the change.

5. The duty to report a personal interest to the board

Directors are required by law to declare to the board any interest that they have in a contract or transaction made by the company, or that proposed by the company. The requirements are far-reaching and cover a direct or indirect interest. They also cover companies or persons connected to the director. This includes (but is not limited to) spouses, children under eighteen, business partners, and companies in which the director controls a minimum of (say) 5 per cent of the shares.

If the latest Table A applies, a director may attend a board meeting at which such a matter is discussed and he may speak freely at the meeting. However, he may not vote on the matter.

6. The duty of care

The powers of a director must be exercised in good faith and in the interests of the company. He must exercise reasonable care and skill in the performance of these duties. The standards required are not set too high, which is just as well. A director is not expected to exercise skill in matters with which he is unfamiliar, but he is expected to take care and exercise reasonable skill in matters in which he is familiar.

Above all a director is expected to exercise common sense and give sufficient time and attention to his duties. He is expected to seek suitable advice when necessary.

7. The fiduciary duty

Directors are in a position of trust and must act in what they consider to be the best interests of the members. The court will normally accept a genuine attempt to do this by directors. It will not second-guess the directors and substitute its own judgment of the best interests of members, provided that the belief of the directors was genuine and that they acted in good faith. The court will decide otherwise only if the directors' behaviour was extraordinary and that no reasonable person could possibly have believed that it was in the interests of members.

Directors must not put their personal interests ahead of those of the company, except in cases where they have disclosed the facts to the members and obtained their permission.

8. The duty to act within their powers

Directors must not do anything beyond the scope of the objects clause in the memorandum, and they must not do anything not permitted by the articles. If theses rules are broken, the directors may be personally liable to the company for any losses caused. There is a further risk that the act may not bind the company and that the directors may be personally liable to third parties for losses incurred.

It may be possible to have such acts of commission or omission ratified by the members if they are willing to do so, either before the event or retrospectively. However, some acts can never be ratified. They include:

* a fraud on the minority by the majority

* a dishonest act

* an act requiring a special procedure (such as court approval) where the act has taken place without the special procedure being followed.

9. Duties when a company has financial difficulties

Directors should take proper professional advice as soon as they suspect that a company may be in difficulties or be about to get into difficulties. They should keep and use proper records to enable them to recognise this. They should not trade beyond the point where they should stop and they should act in the interests of the creditors as a whole and of the company as a whole. They should carefully observe the law relating to insolvency and associated matters.

A director of a company in financial difficulties may wish to resign. This is often desirable and may well be acceptable if the company is left in safe hands. However, directors have a duty to minimise losses and to act responsibly. They should oppose the actions of other directors if they believe them to be unlawful or irresponsible. It is difficult for a director to do this after he has resigned, and in some circumstances it is a director's duty to continue and do his best from within the board. He might be criticised or even penalised if he opts out by resigning. A director may have responsibilities to a company after he has resigned. These may, for example, include co-operating with a liquidator.

10. Statutory registers and provision of information to Companies House

Companies are required by law to keep and maintain the following registers:

* Register of members.

* Register of directors and secretaries.

* Register of directors' interests in shares and debentures.

* Register of interests in voting shares (public company only).

* Register of charges.

* Register of debenture holders (not compulsory).

There are laws about their maintenance, time limits for making amendments, where they must be kept, who can inspect them and at what hours, and charges that may be made for inspection. Directors are responsible for seeing that these rules are observed.

Companies are required by law to report certain information to the Registrar of Companies at Companies House. This includes an annual return, accounts, certain forms and certain resolutions. There are time limits and requirements concerning formats and so on. Directors are responsible for this or for seeing that it is done.

11. Accounts and accounting records

It is a Companies Act requirement that companies keep proper accounting records. Accounts must be prepared by the directors from these records, formally approved by the directors, signed by one director on behalf of them all and delivered to members and to Companies House. All this is the responsibility of the directors and time limits apply.

12. Duty to co-operate with an auditor and others

Directors have a duty to answer reasonable questions from company auditors, to make available requested documents and to give reasonable co-operation. The same applies to liquidators, receivers and administrative receivers.

13. Dividends

Directors must ensure that dividends are paid only out of retained profits available for the purpose and not out of capital. They must ensure that their dividend policy is lawful and that it is sensible and prudent. Directors may commit an offence and be personally liable if they pay excessive dividends.

Additional resources

Books

The directors handbook: your duties responsibilities and liabilities, Martin Webster ed

London: Kogan Page in association with Pinsent Masons, 2005

Theories of corporate governance: the philosophical foundations of corporate governance, Thomas Clarke ed

London: Routledge, 2004

Company directors desktop guide 2nd ed, David M Martin

London: Thorogood, 2004

Tolleys corporate governance checklists, Matthew Baker and Wendy Tate

Croydon: LexisNexis UK, 2004

Boards at work: how directors view their roles and responsibilities, Philip Stiles and Bernard Taylor

Oxford: Oxford University Press, 2001

This is a selection of books available for loan to members from the Management Information Centre. More information at: www.managers.org.uk/mic

Organisations

Companies House, Crown Way, Maindy, Cardiff , CF14 3UZ

Tel: 0870 333 3636 www.companieshouse.gov.uk

Companies House, 37 Castle Terrace, Edinburgh, EH1 2ED

Tel: 0870 333 3636 www.companieshouse.gov.uk

European Corporate Governance Institute (ECGI)Avenue des Statuaires 120,

1180 Bruxelles, Belgium www.ecgi.org

Internet resources

The combined Code on Corporate Governance Financial Services Authority (FSA) (July 2003) The Combined Code on Corporate Governance sets out standards of good practice for listed companies in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf

Companies House Directors and Secretaries Guide (August 2005) www.companieshouse.gov.uk/about/pdf/gba1.pdf

Company Law Reform in the UK: A Progress Report (March 2005) Eilis Ferrin, Research Associate, European Corporate Governance Institute (ECGI) University of Cambridge-Faculty of Law; European Corporate Governance Institute (ECGI) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=644203
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Title Annotation:Checklist 187
Publication:Chartered Management Institute: Checklists: Small Business
Geographic Code:4EUUK
Date:Feb 1, 2006
Words:2349
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