As a Director, you will probably already understand the day to day decisions for the company and the metaphorical buck now stops firmly with you, but what about company procedures, legal duties, lifetime liabilities and the ‘fine print’ of being a Director?
The Fine Print of the Law
As a Director on a Board, you will be acting as a collective and decisions made are on behalf of the company as a whole and which can affect the whole business. A Director therefore holds a number of general duties not just to the legal entity of the company but also to the shareholders.
The most prominent duties are:
- A duty to act in accordance with the company’s Articles of Association and to exercise powers only for the purposes for which they have been granted;
- A duty to act on behalf of the company and in good faith in order to promote the general success of the company;
- A duty to exercise independent judgment;
- A duty to avoid conflicts of interest;
- A duty to exercise reasonable care, skill and diligence;
- A duty not to make any personal profit from their position as a Director unless authorised by the Articles or a Resolution; and
- A duty to disclose any personal interest in a proposed transaction or arrangement of the company which may or may not lead to a conflict.
Failure to follow the above duties may result in the company itself bringing a civil claim against you as a Director for breach of that duty or even a shareholder may do it on the company’s behalf. In some circumstances, there may also be criminal penalties. Although in smaller companies, the Directors will usually be the Shareholders or the entire board may be the only Shareholders, a company will not always be this way and you should ensure you protect yourself at all times.
If you as a Director commit negligence, default, breach of duty or breach of trust, then the shareholders can actually ratify the breach by passing an ordinary resolution. This is because they are the owners of the company and can agree to waive the right to pursue you. Where you are in a small company, this is naturally a benefit.
However, be aware and note that if you are also a shareholder of the company you have inadvertently wronged, then any votes you cast in your own favour (as well as votes of your family or other ‘connected persons’) will be disregarded when calculating the required 50% unless everyone is unanimously agreed.
If you cannot obtain the ratification of your actions, your fellow Directors may pursue you in the Courts for your actions and the loss to the company. If they fail to do so, apart from potentially being in breach of their duty to the company itself, a shareholder may start an action against you on the company’s behalf. However, they require the Court’s permission and any damages are payable to the company and not the shareholder.
The reason directors find themselves personally in court for breach of fiduciary duties or otherwise will often be through failing to follow a transparent process, keeping the board and shareholders up to date and themselves not understanding the extent of their duties.
Directors also mistakenly believe that by resigning means they are no longer liable for any decisions they have made , which can always come back to haunt directors if the appropriate exit agreements have not been signed.
Liability for decisions you have made will last your lifetime, even when you have left the company and are enjoying peaceful retirement. A company cannot exclude or exempt a Director from their liability for negligence, default, breach of duty or breach of trust in relation to the company and any such attempt to do will be considered null and void.
However, as an outgoing Director will always be wary of such a point arising, it is common for the company to purchase insurance for its Directors against any such liability attaching to them in connection with any such negligence, default, breach of duty or trust that may arise in the future and/or provide an indemnity within an agreed.
If you can persuade them to do both of these, you can go back to planning your relocation to a to the Seychelles in peace!
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