Directors Duties

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Limited Company Duties:

• To maintain proper books of account;
• To prepare annual accounts; 
• To have an annual audit performed (subject to exceptions); 
• To maintain certain registers and documents; 
• To file certain documents with the Registrar of Companies; 
• To hold general meetings of the company.

 

Directors – Common Law Duties

• Directors must exercise their powers in good faith and in the interests of the company as a whole.
• Directors are not allowed to make an undisclosed profit from their position as directors and must account for any profit which they secretly derive from their position as a director.
• Directors are obliged to carry out their functions with due care, skill and diligence.

Directors - Statutory Duties.

• Duties as a company officer under the Companies Acts;
• Duty to maintain proper books of account;
• Duty to prepare annual accounts;
• Duty to have an annual audit performed;
• Duty to maintain certain registers and other documents;
• Duty to file certain documents with the registrar of companies;
• Duty of disclosure of certain personal information;
• Duty to convene general meetings of the company;
• Duties regarding transactions with the company;
• Duties of directors of companies in liquidation and directors of insolvent companies

Company Secretary Duties.

• To ensure specifically that the company complies with the law.
• To see to it that the company and observes its own regulations.
• Duty of disclosure of certain personal information;
• Duty to exercise due care, skill and diligence
• Administrative duties

 

 

COMMON LAW DUTIES OF DIRECTORS

The common law has treated the duties of directors as akin to those of trustees.These duties have evolved on a case by case basis. They could be summarised as being duties of competence, fairness and disclosure.The Jenkins Committee which reported on the UK Companies Act, 1948 and which inspired some variations of that Act in our own 1963 Act recommended that the Companies Acts should provided that:

• a director of a company should observe the utmost good faith towards the company in any transaction with it or on its behalf and should act honestly in the exercise of thispowers and the discharge of the duties of his office;
• a director of a company should not make use of any money or other property of thecompany or of any information acquired by virtue of his position as a director or officer of the company to gain directly or indirectly an improper advantage for himself at the expenses of the company;
• a director who commits a breach of these provisions should be liable to the company for any profit made by him and for any damage suffered by the company as a result of the breach;

these provisions should be in addition to and not in derogation of any other enactment of rule oflaw relating to the duties or liability of directors of a company.

The Company Law review Group has identified the following eight duties as the primary common law duties of directors, which it recommends be stated in the Companies Acts.Highlighted are those which are most immediately relevant to the provision by a Company of credit for the benefit of its directors.

 

 

1. Duty of loyalty

A director must act in good faith in what he considers to be the interests of the company.

 

2. Duty of obedience to company constitution

A director must act in accordance with the Company’s memorandum and articles of association and must exercise his powers only for the purpose allowed by law.

 

3. Duty of avoidance of secret profits

A director must not use a Company’s property, information or opportunities for his own or for anyone else’s benefit unless he is allowed by the company’s memorandum and articles of association or the use has been disclosed to the members and an ordinary resolution passed consenting to it.

 

4. Duty of independence of judgment

A director must not agree to restrict his power to exercise an independent judgement.However,if he considers in good faith that it is in the interests of the company for a transaction to beentered into and carried into effect, he may restrict his power to exercise an independentjudgement in the future by agreeing to act in a particular way to achieve this.

 

5. Duty to avoid conflicts of interest

If there is a conflict between an interest or duty of a director and an interest of the company in any transaction, he must account to the companyfor any benefit he receives from the transaction. This applies whether or not the company sets aside the transaction.

However, a director need not account for the benefit if he is allowed to have the interest or duty by the company’s memorandum and articles of association or the interest or duty has been disclosed to the members and approved by ordinary resolution.

 

6.  Duty of care, skill and diligence

A director owes the Company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both (i) the knowledge and experience that may reasonably be expected of such a person in the same position as the director, and (ii) the knowledge and experience which the director has.

7. Duty to consider interests of third parties

A director must have regard to the interests of the company’s employees in general and to those of its members, and where the company is insolvent, its creditors.

It is proposed to provide in the future that a director appointed or nominated for appointment by a member with an entitlement so to appoint or nominate under the articles of association or a shareholder’s agreement may have regard to the interests of that member.This rule would be added as a variant to the existing rules.

 

8. Duty of fairness

A director must act fairly as between different members.

 

Common law duties are owed to the company.

The duty of each director to act as a fiduciary is owed to the company of which the person is a director.Therefore, when it comes to enforcing any of the fiduciary duties, the proper party to bring the proceedings is the company.

 

 

PROVISION OF CREDIT BY COMPANIES TO DIRECTORS

The provisions of credit by a company to its directors is another matter caught by the general rules of conflict of interest outlined above.Section 31 of the 1990 Act contains a complex set of prohibitions on directors and people connected with them from dealing with the company.However, there are also a number of reliefs which water down the blanket prohibitions set out in s 31.

 

Prohibited transactions

The provisionsof s 31 to 40 of the Companies Act, 1990 apply to directors, shadow directors and persons connected to such directors or shadow directors of the company and of its holding company.The legislation was introduced to prevent the controllers of companies abusing their position of power by diverting company assets to themselves, whether directly or indirectly

• The company cannot make a loan to such a person.
• The company cannot enter a quasi loan with such a person.A quasi loan arises ifthe companypays a sum for that person or reimburses a third party for expenditures incurred by the third party for that person and if that person is to reimburse the company or has a liability to reimburse the company.
• The company cannot enter into a credit transaction with such a person.A credit transaction exists if the company is to supply goods or sell land by hire purchase or conditional sale, or lease or licence land or hire goods for periodical payment, or dispose of land or supply goods or services on the understanding that payment will be deferred.
• A company cannot be involved in an arrangement whereby some other entity enters into a transaction which if entered into by the company would have been prevented by s 31 and that other party is to get some benefit from the company, its holding company or a subsidiary of the company or its holding company.
• The company may not provide a guarantee or indemnity or any security in connection with any loan, quasi loan or credit transaction made by some third party to a director, shadow director or connected person.

 

Reliefs

1 Section 32 – Less than 10%

 

If the company:

• makes a loan or quasi-loan to a director or a person connection with a director, or
• enters into a credit transaction as creditor for a director or a person connected with a director

then there is a general exemption if the aggregate value of such transactions is less than 10% ofthe net assets of the company as per the last accounts or called up share capital (if there are no such accounts) .However, guarantees, indemnities and securities are not covered by this exemption.

Furthermore, if the aggregate value at some time in the future exceeds the 10% limit then the company, the directors, shadow directors and any person with whom the arrangements were made must within two months amend the arrangement so that the value is brought down below the threshold.If not, s 31 is breached.

 

2  Section 34 – Whitewash procedure

A company will be entitled to:

• enter into a guarantee or provide any securityin connection with a loan or quasi-loan made by any other person for a director of the company, or of its holding company, or for a person connected with such director.
• enter into a guarantee or provide any security in connection with a credit transaction made by any other person for a director of the company, or for a person connected with such director

 

if the following steps are taken:

 

1.Resolution

The members of the company have approved the offending transaction by a special resolution (which can be a written resolution if the articles of the company allow) not more than 12 months before the transaction.

   

2.Statutory Declaration

A majority of the directors (or both directors in a 2 director company) must swear a statutory declaration that, among other items, they have made a full inquiry into the affairs of the company and are of the opinion that having entered into the transaction, the company will be able to pay its debts in full as they fall due.

 

3.Auditor’s Report

The statutory declaration must be accompanied by a report by an independent person qualified to be an auditor of the company whereby the independent person states that in his opinion the statutory declaration is reasonable:

 

3. Section 35 - Group Relief

Where the appropriate group structure is in place, the s 31 prohibitions will not apply to intra-group transactions.

 

A company may:

• make a loan or quasi-loan to any company which is its holding company.
• make a loan or quasi-loan to any company which is its subsidiary or a subsidiary of its holding company (i.e. a sister company)
• enter into a guarantee or provide security in connection with a loan or quasi-loan made by any person to its holding company.
• enter into a guarantee to provide security in connection with a loan or quasi-loan made by any person to its subsidiary or to its sister company
• enter into a credit transaction as creditor for its holding company
• enter into a credit transaction for its subsidiary or sister company
• enter into a guarantee or provide security in connection with a credit transaction made by any person for its holding company
• enter into a guarantee or provide security in connection with a credit transaction made by any person to it subsidiary or to its sister company

 

4. Section 36 – Expenses of directors

Funding vouched expenditure properly incurredfor the company is exempt from s 31 provided the expenditure is incurred or the money is refunded within six months from the date on which the funding was given.

 

5. Section 37 – Ordinary course of business

Section 31 does not apply if the company enters into the transaction in the ordinary course of its business and does not give the director, shadow director or connected person any special terms.This exception provides a deceptively attractive method of legitimately avoiding the s 31 obligation.However, it is unclear when a company making a loan or quasi loan or entering into a credit transaction as creditor is acting in the ordinary course of its business.

 

The above reliefs are summarised in the following table

  

Transaction –             Loans         and          Credit               Guarantees and Guarantees and

Relief                          Quasi Loans               Transactions     Security      for Security for

                                                                                                   Loans          and   Credit

                                                                                                  Quasi-Loans         Transactions

 

Section 32

“Less than 10%           Yes                              Yes                     No.                           No.

 

Section 34

“Whitewash”               No                               No.                     Yes                           Yes

 

Section 35

“Group Relief”            Yes                              Yes                     Yes                           Yes

 

Section 36

“Expenses of

Directors”                    Yes                              Yes                     Yes                           No

 

Section 37

“Ordinary” Course

of Business”                Yes                              Yes                      No.                          No.

 

 

Table of Reliefs The list of the prohibited transactions runs from left to right.  The list of reliefs runs from top to bottom.  So, for example, the s 34 whitewash procedure can be used for a guarantee of a lease (i.e. a credit transaction) but not for the lease itself.

 

Civil remedies for breach of s 31

 

Avoidance of transaction

 

The company may avoid a transaction which breachess 31 unless

 

(i)restitution is impossible;

 

(ii)the company has been indemnified; or

 

(iii)a bona fide purchaser for value without actual notice would be affected by the avoidance.

 

Liability to account

 

If s 31 is breached, a director, shadow director and connected person involved in thetransaction and any director who authorises the transaction are liability to accountto the company for any gain made by them and must indemnify the company for any loss suffered by it.

 

Relief is available to a director or shadow director who shows that he took all reasonable steps to ensure that s 31 was complied with.A person connected with any director or shadow director may abstain relief if he can show that he did not know of the circumstances which constitute the contravention of s 31.

 

Personal liability or insolvency.

 

Even if the 10% exemption applies, personal liability may be imposed. If the company is insolvent and the High Court is satisfied that the arrangement materially contributed to the insolvency or impeded the winding up then the Court may on the application of the liquidator or creditor or contributory declare that anyone who benefited from the arrangement shall be liable for the debts of the company.

 

Where a director makes the statutory declaration under the whitewash procedure in a s 34 without having reasonable grounds for his opinion, the courts may make the director personally responsible (without limitation of liability) for all or any of the liabilities of the company.If the company is wound up within 12 months after the director makes his statutory declaration,then it is presumed that he did not have reasonable grounds for his decision.It is then up the director to overturn that presumption.

 

Criminal consequences of breach of s 31

 

Any director, shadow director or secretary who allows the company to breachs 31 is guilty of an offence as is any person who procures that the Company enters into such a transaction knowing or having reasonable cause to believe that the company would thereby break s 31.

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