Directors' Duties

Transcript

Emma O'Connor: 00:08

Hello and welcome to DC Talks, a podcast series from specialist law firm Doyle Clayton, where we take a dive into an HR, a legal or a management issue. I'm your host, Emma O'Connor, a partner in our employment team and Head of Client Training. For this podcast, I am very pleased to be joined by Julian Prentice, who's a partner and Head of Company, Corporate and Commercial Litigation here at Doyle Clayton. Welcome Julian.

Julian Prentice: 00:40

Hi there, Emma. Thank you very much.

Emma O'Connor: 00:42

And before we start and before I ask Julian some questions about directors' duties, just a reminder that this is a podcast. Neither Julian, nor I, nor Doyle Clayton are giving you legal advice. This is a high-level heads up in terms of what you should be thinking about when you are either thinking about being a director or if you are a company owner. So, as always, please do reach out to us. We'll put the information about how you can do that in the show notes, or please do take your own separate legal advice. So, in this podcast episode, we are going to be discussing the thorny subject of directors' duties and I guess the first question, Julian, is what are those duties?

Julian Prentice: 01:31

Yes, thank you, Emma. So the duties of a director are set out principally in the Companies Act, which outlines the general duties of directors and it has pulled together the law in relation to directors' duties. So the starting point is the Companies Act. And they are as follows: To act within your powers, to promote the success of the company for the benefit of its members or shareholders as a whole, which is quite important and crucially, directors are in a position of trust in their capacity as directors of companies, which is very similar to that of a trustee. And this duty is also a core fiduciary duty, therefore. So the duty to promote the success of a company for the benefit of its members is a core fiduciary duty. Importantly, in certain circumstances, where, for example, a company is in financial distress, directors also have a duty to act in the best interests of its creditors. Next on the list is to exercise independent judgment, and then to exercise reasonable care, skill, and diligence, which is similar to not acting negligently. And this is the only one of the list of directors' duties that is not also regarded as a fiduciary duty. There is a duty to avoid conflicts of interest, not to accept benefits from third parties, so for example, exploiting the position as a director for personal benefit. Obvious examples of this would be secret commissions or bribes, and then finally to declare certain interests that they have in a proposed transaction or arrangement with the company.

Emma O'Connor: 03:12

So, some pretty heavy duties there. Just to pick up on a couple of the points that you raise, and obviously, as you said, these are the directors' duties that are set out in the Companies Act. We say that directors should act within their powers. Where might those powers be set out?

Julian Prentice: 03:30

So the powers of directors or the powers that directors have are typically set out in the company's constitutional documents, so the Articles of Association, but also in general company law and the Companies Act.

Emma O'Connor: 03:42

And then also we say fiduciary duties, which is one of those wonderful legal words. What do we mean by fiduciary duties?

Julian Prentice: 03:50

So fiduciary duties are the duties owed by someone in a position of trust to look after something for the benefit of someone else or something else. And because of the way that the English and Welsh legal system has developed, the position of a director of a company has been viewed similarly to the position of a trustee. And so that means that directors' duties can be both legal in the sense of in line with and governed by the Companies Act, for example, but also fiduciary to look after the best interests of the business for its members or shareholders.

Emma O'Connor: 04:30

Brilliant, thank you. I suppose my next question is why are these powers, why are these duties important? And that would be to the company, but also why are they important or why should why should they be important to directors as well?

Julian Prentice: 04:48

Yes, thanks, Emma. So a director of a company is in a substantial position of power. They are able to do things that only directors can do and take decisions for and on behalf of the company. With that power comes significant responsibility though. It's important that directors are aware both of what they have the power to do, but also what they must not do because of their role as a director. A director with a good understanding of both their rights and obligations is able to get the best out of the role and influence the future of the business. Put another way, directors performing their duties correctly are crucial for the success of a business and the company for the benefit of its members or shareholders.

Emma O'Connor: 05:34

So, directors of that mix of statutory powers, implied fiduciary duties, and obviously, as you said, going back to not just the director's Service Agreement but looking at Articles of Associations, you said the company's constitution. As you say, you know, with this great role comes obviously lots of responsibility. And I would imagine in your role as commercial litigator, you often see issues arise with regards to directors stepping above and beyond what their powers are, maybe getting themselves a bit caught up in misunderstanding where the line is, particularly with regards, I would imagine, to acting in the best interests of the business and as you said, of the of the members and shareholders. So looking at what you do sort of day-to-day, thinking about what comes across your desk, where are the common risk areas and pitfalls, Julian?

Julian Prentice: 06:31

Yes, thank you, Emma. That's absolutely right. So the main risks for directors come from them taking on the role without a clear understanding of the responsibilities that go with that. The consequences of getting it wrong can be extremely severe for directors and can expose those individuals to personal liability. Importantly, directors who are also shareholders or members of a company need to be careful not to let their position as a shareholder of the business influence how they act as a director. This is a common mistake that directors who are also shareholders fall into or fall foul of. Directors owe duties to shareholders, importantly, as a whole, so the entire body of the shareholder body, and in certain circumstances to the company's creditors. Difficulty can arise where a director acts in their own interests as a shareholder without regard to the full body of shareholders. In addition, someone can assume the role as a director with all that goes with that without necessarily being formally appointed as such. So someone or an individual acting as a director, taking assuming the roles and responsibilities of a director, can find themselves in a position where they are responsible as if they were formally appointed as a director. And this is something that individuals need to be very careful of.

Emma O'Connor: 07:51

Julian, that's really helpful. So let's think now about some of the cases that you've been involved in around directors' duties, and maybe you could share some of the issues that you regularly see come across your desk.

Julian Prentice: 08:07

Sure, thank you, Emma. I think it's possibly easiest to split the two types of cases, although there are all sorts of cases that involve allegations of breach of director's duties and fiduciary duties. Splitting it into two categories is possibly simplest, just to give a bit of an example for each. The first category is a situation where the business or the group of businesses is in financial difficulty or entering into an insolvency process and in those circumstances, you're typically looking at a situation where the interests of creditors have been prejudiced by the actions of a particular director, and in certain some circumstances, creditors will not be repaid what they are owed in full. And in those instances, if for example a director or directors have been involved in a transaction which was bad for the company and bad for the creditors, like for example, selling a valuable business asset for less than it was worth at the time, causing the creditors to be out of pocket, then the directors can be pursued for breach of their directors' duties, resulting in the creditors not being paid in full. In those circumstances, for example, the transaction can be undone, or the directors can be pursued in their personal capacities, or both. The other category of cases arise out of companies that are not in financial difficulty, so solvent businesses, where, for example, maybe a director has been involved in orchestrating a team move, for example. So a director has decided to leave the business and set up a new business of his own, perhaps taking with him employees of the company. In those circumstances, that director is likely to have acted in breach of his or her director's duties. And the classic director's duties which are at risk of being breached in those circumstances are the duty to avoid conflicts of interest and the duty to declare interests that they have in a proposed transaction or arrangement. In those circumstances, for example, a director setting up a competing business will very often be acting in conflict of interest. So his interests will no longer align with the business, and he may well be acting contrary to the interests of the business. In addition to that, so in addition to being in breach of duties as a director of fiduciary duties, a director that sets up a competing business is likely to also be in breach of their employment contracts or other contractual obligations owed to the business. And those also need to be kept closely in mind and will be relevant in any proceedings that do start against those directors. But fundamentally, directors always need to keep firmly in mind their legal obligations to the company under company law, regardless really of additional contractual obligations, although those are also relevant in certain circumstances.

Emma O'Connor: 11:34

Thanks, Julian. Really helpful there, and it's always good to get an insight in terms of the types of cases and the sorts of issues that you are helping clients with. So, how can people find out more about what you do and also how can they get in touch?

Julian Prentice: 11:51

Yes, absolutely. My details will of course be on the website and the services that we offer at Doyle Clayton in this context of company corporate litigation services are also supported closely by the expertise that we have with the corporate department, so the advisory corporate department, and also the flagship expertise that Doyle Clayton has with respect to employment law, because frequently cases involving director's duties have elements of company law and require corporate advisory assistance but also employment law. One thing also to be closely aware of is that there are always risks in business. And the best way to minimize those risks is to take early expert advice and guidance when setting up a business or implementing significant changes to it. Doyle Clayton's expert corporate lawyers are there to help lay the foundations of a business and provide corporate governance guidance to its directors. Unfortunately, though, from time to time things do go wrong and disputes arise. I frequently represent companies and individuals guiding them through disputes and litigation should it arise.

Emma O'Connor: 13:03

That's great, Julian. Thank you very much for that. I'd echo those thoughts as well. It's great that we can all work together, particularly around employment, corporate, commercial, and also I'd add to that investigations as well, our specialist investigation team working with corporate and commercial clients? Thank you very much for joining me, Julian. That's some really great tips there.

Julian Prentice: 13:24

Thank you, Emma.

Emma O'Connor: 13:26

And just remember, as always, this is a podcast. We are not giving you legal advice, so please do get in touch with Julian or his team if we can help give you some further guidance. And also don't forget to follow Doyle Clayton and like and subscribe. Until I get the opportunity to speak to you again. Thank you very much for joining and listening to DC Talks.