Company Directors: what are your responsibilities?

As a society, we need to have confidence in the companies that we do business with. We want to know that they will be run in a responsible way by their directors and officers.

The Companies Act 2014 (“the Act”), for the first time codifies, the duties and obligations of company directors and officers. Part 4 addresses corporate governance; Part 5 outlines the duties of directors and other officers; Part 14 deals with compliance and enforcement; disqualification and restriction of directors.

Under Section 223, directors are now required to sign the following declaration;

“I acknowledge that, as a director, I have legal duties and obligations imposed by the Companies Act, other statutes and at common law”.

Directors have what is known as a “fiduciary duty” to the company. This means that the director must act solely for the benefit of the company.

The Act requires directors to take into account the interests of employees. It also requires directors to consider the interests of members/shareholders. However, their ultimate duty is to the company.

Section 228 includes the following requirements of directors:

■ act in good faith; and in the best interests of the company;

■ act honestly and responsibly in relation to the conduct of the affairs of the company;

■ act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law;

■ not to benefit from or use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless the company’s constitution permits it or a resolution is passed in general meeting;

■ not to agree to restrict the director’s power to exercise an independent judgment unless this is expressly permitted by the company’s constitution;

■ to avoid any conflict between the director’s duties to the company and the director’s other interests unless the director is released from his or her duty to the company in relation to the matter concerned;

■ to exercise the care, skill and diligence which would be reasonably expected of a person in the same position with similar knowledge and experience as a director. A director may be held liable for any loss resulting from their negligent behaviour

A director may be held liable for any loss resulting from their negligent behaviour and required to indemnify the company for any such loss of damage.

Section 235 of the Act states that the company cannot indemnify its directors and officers from liability for negligence, default, breach of duty and/or breach of trust; it can purchase insurance to cover them for allegations of wrongful acts such as the above.

It is prudent for all company directors and officers to ensure that prior to taking office; the company has directors and officers insurance cover in place. In the absence of same, a director faces unlimited personal liability for decisions taken in the role.

A directors and officers policy (“D&O”) is typically divided into Side A cover which relates to protection for directors and officers and their personal assets against liability that the company cannot indemnify them for; Side B which relates to the company balance sheet and liability that the company can indemnify directors for; Side C typically relates to company liability subject to a stated limit.

Given the duties and obligations of directors and officers, it is prudent to ensure that prior to taking up an office; the company has purchased an adequate D&O policy. This can support directors in their role by lessening the exposure of their personal assets when defending allegations of wrongful acts.

Our above memo is prepared for general information purposes; it does not purport to provide legal advice. O’Connor solicitors accept no responsibility for losses that may arise from reliance on information contained in this post. It is intended to identify general issues on which you may require legal advice. Full legal advice should be taken from a suitably qualified professional when dealing with particular circumstances.