KCB revision - SLIDE DECK 4 - Duties and powers of Directors Flashcards
Where are powers of the directors derived from?
Powers of Directors are derived from the Articles of Association, the written rules about running the company agreed by the shareholders and directors.
List the general duties of a director and the legislation in which you would find this.
CA 2006 section 171-177
- To act within their powers in accordance with the company’s constitution (and to use those powers for proper purposes) (s. 171)
- To promote the success of the company (s. 172)
- To exercise independent judgement (s. 173)
4.To exercise reasonable care, skill and diligence (s. 174)
- To avoid conflicts of interest (s. 175)
- Not to accept benefits from third parties (s. 176)
7.To declare any interest in proposed transactions or arrangements (s. 177)
Detail important factors in Directors Duties to ‘Act within powers s171’
A director must act in accordance with the Company’s constitution
These are the powers set out in the Articles and other resolutions or agreements
Detail important factors in Directors Duties to ‘To promote the success of the company
(s172)
Factors to be considered:
The likely consequences of any decision in the long term
The interests of the company’s employees
The need to foster the company’s business relationships with suppliers, customers and others
The impact of the company’s operations on the community and the environment
The desirability of the company maintaining a reputation for high standards of business conduct
The need to act fairly as between members of the company
Requirement to report on s172 in strategic report (s414c, CA2006)
Detail important factors in Directors Duties ‘To exercise independent judgement
(s173)
Must not fetter their discretion
The Act notes that there are times when the directors’ ability to exercise independent judgement is restricted when acting in accordance with an agreement entered into by the company
Detail important factors in Directors Duties ‘To exercise reasonable care, skill and diligence
(s174)
See Dorchester Finance Co.Ltd v Stebbing [1989]
‘a reasonably diligent person with—
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
the general knowledge, skill and experience that the director has.’
Re D’Jan of London Ltd [1993]
Differs for Exec Directors and NEDs
The courts in the UK are generally reluctant to condemn business decisions made by directors that appear, in hindsight, to show errors of judgement. Directors can exercise reasonable skill and care, but still make bad decisions.
Detail important factors in Directors Duties ‘To avoid conflict of interest
(s175)
Directors must avoid situations where they may have a direct or indirect interest, which is, or could potentially be, in conflict with the interests of the company
Such conflicts can be avoided if the matter has been authorised by the board
Detail important factors in Directors Duties ‘Not to accept benefits from third parties
(s176)
Directors must not accept benefits from third parties in respect of their position as a director of the company
This is designed to prevent a conflict of interest being created. Unlike the position with the conflict of interest there is no provision for the board to authorise the benefit
Detail important factors in Directors Duties ‘To declare interests in any proposed transaction or arrangement
(CA s177)
A director must declare a direct or indirect interest in a proposed transaction or arrangement
This relates to an interest where they either are aware or ought to have been aware
The failure to declare an interest may result in the transaction or arrangement being voided with the director subject to a criminal penalty
This is in addition to other duties under the Act for directors to disclose information about themselves and their interests
Who can bring an action against a director for a breach of a general duty?
NB - Need to clarify this at the revision session….
Insolvency Practitioner
Derivative actions
in relation to an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust
Fraudulent or wrongful trading
What is the core purpose of directors and officer’s insurance?
The core purpose of a D&O policy is to provide financial protection for directors against the consequences of actual or alleged “wrongful acts” when acting in the scope of their duties.
These include:
breach of trust
breach of duty
neglect
error
misleading statement
wrongful trading
The D&O policy will pay for defence costs and financial losses.
