Legal duties of a Company Director Duty to promote
Description: Legal duties of a Company Director Duty to promote the success of the company Duty to exercise reasonable care, skill and diligence Duty to act within the law and the constitution Duty to exercise independent judgement Duty to avoid
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slide1. Legal duties of a Company Director Duty to promote the success of the company
Duty to exercise reasonable care, skill and diligence
Duty to act within the law and the constitution
Duty to exercise independent judgement
Duty to avoid conflicts of interests and duty to disclose relevant interests
Duty not to accept benefits from third parties<br>
slide2. Promote the success of the company<br>
slide3. Part 1: Fiduciary duty A Director must act in a way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole
In good faith: as long as Directors act honestly, they have the right to use their discretion and judgement in exercising their decision-making powers
Success: designed to achieve the objectives of the company (financial, strategic or otherwise)
Not their own interests, the interests of any section or group of members or those of any outside organisation<br>
slide4. Part 2: Enlightened Shareholder Value In the course of making decisions under Part 1, Directors are required to ‘have regard to’:
Likely consequences of any decision in the long term
Interests of the company’s employees
Need to foster the company’s business relationships with suppliers, customers and others
Impact of the company’s operations on the community and the environment
Desirability of the company maintaining a reputation for high standards of business conduct
Need to act fairly between members of the company<br>
slide5. Reasonable care, skill and diligence<br>
slide6. Care, skill and diligence A reasonably diligent person with the general knowledge and skill expected of a Director
Where a Director has additional skill and experience, s/he must act in the way that a reasonably diligent person with this extra expertise would have done
Do not need to give the affairs of the company their continuous attention - entitled to rely on the honesty of management unless there are grounds for suspicion
Directors should receive induction training on their roles and responsibilities at an early stage<br>
slide7. Care, skill and diligence Meetings
Directors need to meet ‘sufficiently frequently’ to enable them to “keep abreast of and control the company’s affairs”
Directors should attend meetings regularly, and obtain and read the minutes of any meeting that they have missed
Directors should prepare for meetings by reading papers (including the minutes) in advance of meetings and making reasonable enquiries into the company’s affairs<br>
slide8. Care, skill and diligence Finances
Directors should receive financial information at all Board meetings
Directors should be scrupulous in the attention paid to the company’s present and future liquidity and ensure concerns and actions are minuted
Directors are expected to demonstrate some competence in financial matters (especially in times of insolvency) and should receive some financial training
Stricter test of competence for Directors taking company into insolvency (personal responsibility to creditors)<br>
slide9. Other general duties<br>
slide10. Duty to act within powers A Director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred
All Directors should receive a copy of the company’s constitution, read and understand it
Directors must ensure compliance with the directions and limitations in the constitution
Formal procedures should always be followed at Board meetings and a formal schedule of matters reserved for the decision of the Board helps to provide clarity
Directors should not use their powers for purposes inconsistent with the interests of the company
If in doubt, take advice<br>
slide11. Duty to exercise independent judgement etc. A Director must exercise independent judgement
The gist of this is that Directors cannot fetter their discretion – i.e. give away their decision-making role
Personal interests should not be allowed to affect a Director’s independent judgement
A Director’s independent judgement may be informed by legal and other professional advice
Shadow Directors<br>
slide12. Duty to avoid conflicts of interest Where there is a clash between personal interests and the company’s interests, the company must come first
Onus is on the Director not to put him/herself in a position where his interest and duty conflict in the first place
Real conflicts and perceived conflicts of interest should both be avoided (reasonable person test)
Possession of information or an opportunity which can be used for personal gain
Only excused if other Directors agree to the Director taking the personal gain and it is minuted (constitution)
Applies even after a Director has left the company<br>
slide13. Duty to declare interests A Director must declare to the other Directors any interest, whether direct or indirect, in a proposed transaction or arrangement with the company
Declaration should be made in advance of the decision
Good practice: Director should not be present when the other Directors take a decision on related matters
Indirect interests are covered – connected persons such as spouse, close relative
Not required if the other Directors know about the interest; the conflicted Director is unaware of having the interest; or that the company was entering into the transaction; or if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest (immaterial/remote)<br>
slide14. Duty to declare interests Section 182 requires a Director to declare an interest in any existing transaction or arrangement into which the company has entered (failure to do so is a criminal offence)
Role of the Chair and company secretary to ensure adherence to the highest ethical standards
Openness and transparency is key
Err on the side of caution
Code of Business Conduct should cover these issues<br>
slide15. Duty not to accept benefits A Director must not accept a benefit from a third party which is given by reason of (a) being a Director or (b) doing or not doing anything as a Director
A Director must not exploit his/her position for personal gain
Defensible and proportionate policies should be drawn up on the acceptance/provision of gifts and hospitality by Directors and staff within the organisation and approved by the Board
Gifts/hospitality offered by a supplier during contract negotiations, offering of corporate hospitality, Bribery Act
Good practice is to have a gifts and hospitality register to record benefits offered/received above a threshold<br>
slide16. Responsibilities of Directors concerning accounting and reporting<br>
slide17. Accounting and reporting Company must keep adequate accounting records
Annual accounts and the Directors’ report
Strategic report
A fair review of the company’s business
A description of the principal risks and uncertainties facing the company
A balanced and comprehensive analysis of the development and performance of the company’s business during the financial year, and the position of the company’s business at the end of that year
Analysis using financial key performance indicators<br>
slide18. Accounting and reporting Approval and signing of the accounts and reports
Publication of the accounts and reports
Distribution of accounts to members etc.
Filing of accounts
Appointment of auditors
Liability Limitation Agreements
Liability of Directors for company accounts
Compensate company for any loss as a result of untrue or misleading statements in the Directors’ report etc.<br>
slide19. Consequences of breaches of Directors’ responsibilities<br>
slide20. Breaches and consequences Criminal and civil actions can be taken against individual Directors
If one or more Directors are opposed to a Board decision that could expose the company or Directors personally to litigation, they should ensure that their opposition is voiced and minuted/recorded in writing
Directors should be afforded access to (1) the advice and support of the company secretary and/or (2) external legal and other professional advice
Companies cannot indemnify Directors against liability to the company or agree to limit a Director’s liability to the company in any way but can indemnify a Director in respect of civil proceedings brought by a third party<br>
slide21. Company Directors’ Disqualification Act 1986 Three or more defaults in complying with company law re filing of documents with the Registrar of Companies
Insolvency: his/her conduct as a Director of the company makes him/her unfit to be concerned in the management of a company
Found guilty of wrongful or fraudulent trading as defined in the Insolvency Act
Disqualification from acting as a Director of a company for a period of between 2 and 15 years<br>
slide22. Insolvency Act 1986 Wrongful trading
If a company has gone into insolvency and, before that liquidation took place, a Director knew, or ought to have known, that there was no reasonable prospect that the company could avoid the liquidation, then the court may declare that the Director make a personal contribution to the company’s assets
Fraudulent trading
The court may require a Director to make a contribution to the company’s assets if, in the course of the winding up of a company, a Director was knowingly a party to the carrying on of the company’s business with the intent to defraud the creditors<br>
slide23. Health and Safety at Work Act Directors have collective and individual responsibility for health and safety
Formal procedures should be in place for auditing and reporting health and safety performance
If a health and safety offence is committed with the consent or connivance of, or is attributable to any neglect on the part of, any Director, manager or secretary etc., that person and the company can be prosecuted
Fines, imprisonment, disqualification as a Director
Common law: gross negligence manslaughter<br>
slide24. Civil liability A Director who exposes the company to liabilities in delict (injury to person, damage to financial interests or injury to reputation) may well be in breach of his/her duty to act with skill and care
Company can claim damages from the Director for any loss as a result of the breach
Recovery of any profit made by a Director in breach of fiduciary duty<br>
Duty to exercise reasonable care, skill and diligence
Duty to act within the law and the constitution
Duty to exercise independent judgement
Duty to avoid conflicts of interests and duty to disclose relevant interests
Duty not to accept benefits from third parties<br>
slide2. Promote the success of the company<br>
slide3. Part 1: Fiduciary duty A Director must act in a way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole
In good faith: as long as Directors act honestly, they have the right to use their discretion and judgement in exercising their decision-making powers
Success: designed to achieve the objectives of the company (financial, strategic or otherwise)
Not their own interests, the interests of any section or group of members or those of any outside organisation<br>
slide4. Part 2: Enlightened Shareholder Value In the course of making decisions under Part 1, Directors are required to ‘have regard to’:
Likely consequences of any decision in the long term
Interests of the company’s employees
Need to foster the company’s business relationships with suppliers, customers and others
Impact of the company’s operations on the community and the environment
Desirability of the company maintaining a reputation for high standards of business conduct
Need to act fairly between members of the company<br>
slide5. Reasonable care, skill and diligence<br>
slide6. Care, skill and diligence A reasonably diligent person with the general knowledge and skill expected of a Director
Where a Director has additional skill and experience, s/he must act in the way that a reasonably diligent person with this extra expertise would have done
Do not need to give the affairs of the company their continuous attention - entitled to rely on the honesty of management unless there are grounds for suspicion
Directors should receive induction training on their roles and responsibilities at an early stage<br>
slide7. Care, skill and diligence Meetings
Directors need to meet ‘sufficiently frequently’ to enable them to “keep abreast of and control the company’s affairs”
Directors should attend meetings regularly, and obtain and read the minutes of any meeting that they have missed
Directors should prepare for meetings by reading papers (including the minutes) in advance of meetings and making reasonable enquiries into the company’s affairs<br>
slide8. Care, skill and diligence Finances
Directors should receive financial information at all Board meetings
Directors should be scrupulous in the attention paid to the company’s present and future liquidity and ensure concerns and actions are minuted
Directors are expected to demonstrate some competence in financial matters (especially in times of insolvency) and should receive some financial training
Stricter test of competence for Directors taking company into insolvency (personal responsibility to creditors)<br>
slide9. Other general duties<br>
slide10. Duty to act within powers A Director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred
All Directors should receive a copy of the company’s constitution, read and understand it
Directors must ensure compliance with the directions and limitations in the constitution
Formal procedures should always be followed at Board meetings and a formal schedule of matters reserved for the decision of the Board helps to provide clarity
Directors should not use their powers for purposes inconsistent with the interests of the company
If in doubt, take advice<br>
slide11. Duty to exercise independent judgement etc. A Director must exercise independent judgement
The gist of this is that Directors cannot fetter their discretion – i.e. give away their decision-making role
Personal interests should not be allowed to affect a Director’s independent judgement
A Director’s independent judgement may be informed by legal and other professional advice
Shadow Directors<br>
slide12. Duty to avoid conflicts of interest Where there is a clash between personal interests and the company’s interests, the company must come first
Onus is on the Director not to put him/herself in a position where his interest and duty conflict in the first place
Real conflicts and perceived conflicts of interest should both be avoided (reasonable person test)
Possession of information or an opportunity which can be used for personal gain
Only excused if other Directors agree to the Director taking the personal gain and it is minuted (constitution)
Applies even after a Director has left the company<br>
slide13. Duty to declare interests A Director must declare to the other Directors any interest, whether direct or indirect, in a proposed transaction or arrangement with the company
Declaration should be made in advance of the decision
Good practice: Director should not be present when the other Directors take a decision on related matters
Indirect interests are covered – connected persons such as spouse, close relative
Not required if the other Directors know about the interest; the conflicted Director is unaware of having the interest; or that the company was entering into the transaction; or if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest (immaterial/remote)<br>
slide14. Duty to declare interests Section 182 requires a Director to declare an interest in any existing transaction or arrangement into which the company has entered (failure to do so is a criminal offence)
Role of the Chair and company secretary to ensure adherence to the highest ethical standards
Openness and transparency is key
Err on the side of caution
Code of Business Conduct should cover these issues<br>
slide15. Duty not to accept benefits A Director must not accept a benefit from a third party which is given by reason of (a) being a Director or (b) doing or not doing anything as a Director
A Director must not exploit his/her position for personal gain
Defensible and proportionate policies should be drawn up on the acceptance/provision of gifts and hospitality by Directors and staff within the organisation and approved by the Board
Gifts/hospitality offered by a supplier during contract negotiations, offering of corporate hospitality, Bribery Act
Good practice is to have a gifts and hospitality register to record benefits offered/received above a threshold<br>
slide16. Responsibilities of Directors concerning accounting and reporting<br>
slide17. Accounting and reporting Company must keep adequate accounting records
Annual accounts and the Directors’ report
Strategic report
A fair review of the company’s business
A description of the principal risks and uncertainties facing the company
A balanced and comprehensive analysis of the development and performance of the company’s business during the financial year, and the position of the company’s business at the end of that year
Analysis using financial key performance indicators<br>
slide18. Accounting and reporting Approval and signing of the accounts and reports
Publication of the accounts and reports
Distribution of accounts to members etc.
Filing of accounts
Appointment of auditors
Liability Limitation Agreements
Liability of Directors for company accounts
Compensate company for any loss as a result of untrue or misleading statements in the Directors’ report etc.<br>
slide19. Consequences of breaches of Directors’ responsibilities<br>
slide20. Breaches and consequences Criminal and civil actions can be taken against individual Directors
If one or more Directors are opposed to a Board decision that could expose the company or Directors personally to litigation, they should ensure that their opposition is voiced and minuted/recorded in writing
Directors should be afforded access to (1) the advice and support of the company secretary and/or (2) external legal and other professional advice
Companies cannot indemnify Directors against liability to the company or agree to limit a Director’s liability to the company in any way but can indemnify a Director in respect of civil proceedings brought by a third party<br>
slide21. Company Directors’ Disqualification Act 1986 Three or more defaults in complying with company law re filing of documents with the Registrar of Companies
Insolvency: his/her conduct as a Director of the company makes him/her unfit to be concerned in the management of a company
Found guilty of wrongful or fraudulent trading as defined in the Insolvency Act
Disqualification from acting as a Director of a company for a period of between 2 and 15 years<br>
slide22. Insolvency Act 1986 Wrongful trading
If a company has gone into insolvency and, before that liquidation took place, a Director knew, or ought to have known, that there was no reasonable prospect that the company could avoid the liquidation, then the court may declare that the Director make a personal contribution to the company’s assets
Fraudulent trading
The court may require a Director to make a contribution to the company’s assets if, in the course of the winding up of a company, a Director was knowingly a party to the carrying on of the company’s business with the intent to defraud the creditors<br>
slide23. Health and Safety at Work Act Directors have collective and individual responsibility for health and safety
Formal procedures should be in place for auditing and reporting health and safety performance
If a health and safety offence is committed with the consent or connivance of, or is attributable to any neglect on the part of, any Director, manager or secretary etc., that person and the company can be prosecuted
Fines, imprisonment, disqualification as a Director
Common law: gross negligence manslaughter<br>
slide24. Civil liability A Director who exposes the company to liabilities in delict (injury to person, damage to financial interests or injury to reputation) may well be in breach of his/her duty to act with skill and care
Company can claim damages from the Director for any loss as a result of the breach
Recovery of any profit made by a Director in breach of fiduciary duty<br>