7.8 Directors' Duties Flashcards
What are the statutory duties that a director owes to the company? (APIRANPE)
The Companies Act sets out general duties that directors owe to the company. These duties hold directors to account in the way they manage the company. Only the company will be able to enforce the duties, although shareholders may have a derivative claim.
A. P. I. R. A. N. P. E = Duties also codified in the Companies Act 2006 (ss.171 - 77 and s182)
What does A.P.I.R.A.N.P.E stand for?
Duty 1 (s171): Duty to act within the company’s powers (ACT WITHIN POWERS - A)
Duty 2 (s172): Duty to promote the success of the company (PROMOTE SUCCESS - P)
Duty 3 (s173): Duty to exercise independent judgment (INDEPENDENT JUDGMENT - I)
Duty 4 (s174): Duty to exercise reasonable care, skill and diligence (Reasonable care - R)
Duty 5 (s175): Duty to avoid conflicts of interest (Avoid CoI - A)
Duty 6 (s176): Duty to not accept benefits from third parties (No benefits - N)
Duty 7: (s.177) Duty to declare interest in a proposed transaction or arrangement with the company (Proposed transaction - P)
Duty 8: (s.182) Duty to declare interest in existing transactions or arrangements with the company (Existing transaction - E)
What is a declaration of interest in a transaction (DOI)?
A declaration of an interest in a proposed or existing transaction or arrangement with the company must be made by:
- A meeting of the directors (board meeting);
- A written notice
- A general notice
What are the exceptions to a director making a DOI?
1) It is unlikely that a conflict will arise;
2) The other directors are already aware of it, or ought to be aware, or
3) The director is not aware of it themselves, although directors will be treated as being aware of matters of which they ought reasonably to be aware
What are the consequences for a breach of director’s duty?
- For breach of s174, the director must pay damages
- For all other breaches, the director must account for any profits, return any property, and pay damages; the contract may be rescinded, and an injunction may be ordered against them
How can a director avoid liability for a breach of duty?
1) S175 conflict of interest can be ratified by a board resolution (note director being ratified cannot be part of the quorum and cannot vote)
2) All other breaches can be ratified by an OR. This can be written or at a GM. If the relevant director is a shareholder, their vote doesn’t count (unless unanimous consent is used). The shareholders must all be fully informed of the facts and nature of breach
What are the main remedies for a director’s breach of duty?
The main remedies for a director’s breach of duty are:
- Shareholder ratification;
- Court relief
- Board authorising director’s conduct (for conflicts of interest not arising from transaction or arrangement with the company)
What are the requirements for shareholder ratification?
The shareholders can authorise a director’s breach of duty by passing an OR, ratifying the director’s conduct. Votes of the director (in their capacity as shareholder) and other connected persons will be disregarded when counting the necessary majority.
If done by written resolution, the director and connected persons may not take part in the procedure
What are the requirements for court relief?
If the director is in proceedings for breach of duty or negligence, the court could relieve the director from liability if the court considers that the director acted honestly, reasonably and having regard to all the circumstances of the case, the director ought fairly to be excused.
What are the requirements for the board authorising a director’s conduct (s175 - duty to avoid conflicts of interest)?
In a private company, the board can authorise the director’s conduct. This is provided the company’s articles do not restrict this. If authorisation is given, this means that the director will not be in breach of the duty under s175.
(N.B: Does not apply for s177 or 182)
What administrative requirements must be followed by company directors?
1) Registers of Information: A company must keep registered of all the names of the directors / directors’ residential addresses / shareholders / people with significant control / debenture holders
2) Adequate accounting: Directors are responsible for keeping adequate accounting and tax records.
3) Statutory Filing: The annual reports must be sent by the company to its shareholders and to Companies House. Timescale for filing with Companies House is:
Private company: 9 months after the end of the accounting period
Public company: 6 months
4) Penalties can be levied on the company and fines on the directors can be posed if the accounts are filed late.
5) Annual “confirmation statement”: Details of the shareholders, directors and people with significant control are required to be filed annually with Companies House.
