Director duties and liabilities
17th November, 2012
Company directors have a wide range of responsibilities and breaching these duties can have some very serious consequences.
The recent case of Fry v Sherry, in August 2012, has again highlighted the consequences of such a breach. Mr Sherry, a director, was found to have breached his duties to the company by authorising payments from the company to a shareholder to purchase the shareholder’s shares pursuant to an agreement that was in breach of the Companies Act requirements.
Even though the court accepted that Mr Sherry had acted honestly, had not obtained any personal benefit and had obtained accountancy advice on the commercial aspect of the purchase he had not sought legal advice on the Companies Act requirements and he was therefore ordered to repay the sum of £259,200, which had been paid to the shareholder, plus interest, to the company.
The Court held that it was reasonable to expect a Director to obtain legal advice in circumstances where the Company was entering into an agreement to purchase its own shares. By not doing so the Court held that Mr Sherry was guilty of misfeasance and was not entitled to relief in accordance with s727 of the Companies Act 1985.
What are the main duties?
Directors hold a trusted position within the company and act as its ‘mind’, consequently their level of duty has been set relatively high not only in relation to the company itself and its shareholders but also to third parties such as creditors and employees. The obligations to third parties are of particular significance where the company finds itself in financial difficulty.
The Companies Act 2006 has codified these duties as the general duties; a breach of these duties will have the same repercussions as it would under the common law or in equity.
In addition, under the Insolvency Act 1986 (“IA”), a director can be held accountable for losses which arise through their breach of duty. If a director deliberately continues to trade in an attempt to defraud creditors then they are guilty of the offence of fraudulent trading.
For this offence a director can be made liable for contributions to the company’s assets (s.213 IA). Fraudulent trading is also a criminal offence (s.993 CA) which carries a custodial sentence of up to ten years.
Directors are also required to exercise a reasonable degree of skill and care. This standard is as with the statutory requirements, objective. On top of this requirement are the director’s fiduciary duties to act in good faith.
What happens if a director breaches any of these duties?
Failure to satisfactorily abide by these duties will potentially lead to a civil or criminal action against a director which could result in an award of damages, a fine or even imprisonment.
In addition the court also has the option to make disqualification orders which will prevent individuals from acting as a director. The terms can range from two to fifteen years.
What are the lessons I should take from the decision in Fry v Sherry?
As stated in the introduction, Mr Sherry did obtain accountancy evidence on the commercial aspects of the proposed purchase but did not obtain legal advice on the requirements of the Companies Act.
The fundamental lesson to be taken from the decision is that Directors should involve their Company’s professional advisors and, in particular its lawyers, on all decisions which affect the Company and which require compliance with any legal or regulatory requirements.
If Directors do not and the Company suffers loss, even if the Director acted honestly and received no personal benefit, the Director may well be held to be in breach of his/her duties to the Company and be ordered to indemnify the Company for any loss suffered.
How can Ward Hadaway help?
The potential consequences of being a director appear to be daunting and taking on a role as a director should not be taken on a whim.
However, our dedicated expert teams are here to help with any issues you have, such as:
- By helping you make commercial decisions in confidence by dealing with the legal framework surrounding such decisions.
- Ensuring that your service agreement keeps you protected, including the provision of Director’s Liability Insurance.
- If you feel that your company may be experiencing financial strains we can help you make decisions about the future of the company and your future as a director without running unnecessary risks.
For more details on how we can help you, please contact us.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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