17 Jul Know your responsibilities as a company director
Rachel Clark, Company and Commercial Solicitor, HRJ Foreman Laws Solicitors
Whether you are new to the position or already an established company director, it is vital to fully understand what it means to take on the role, and how to avoid the common pitfalls and misconceptions made by even the most experienced directors.
The role of a company director
Directors are generally responsible for the overall management and day-to-day decision making for a company.
However, whether operating within a large corporate team, or as the sole director of a small personal company, several fundamental principles still apply.
What are the duties of a company director?
Chapter 2 of Part 10 of the Companies Act 2006 sets out the overarching general duties of all directors, namely:
- To act within powers.
- To promote the success of the company for the benefit of its members.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare interest in proposed transaction or arrangement.
On top of this, directors will need to comply with a range of other applicable laws and regulations in relation to acts carried out in their capacity as a director, for example, in relation to fraudulent or wrongful trading under the Insolvency Act 1986 and obligations under legislation relating to data protection, equality, bribery, health and safety and the environment.
Failure to comply with these duties could give rise to various adverse claims being brought against the director, including derivative claims brought in the company’s name, unfair prejudice petitions and/or claims for compensation.
When is a company director responsible for a company’s liabilities?
At the heart of corporate law is the principle that a company is an independent legal entity, crucially meaning that it has the capacity to contract in its own name. Therefore, directors will not generally be personally responsible for a company’s liabilities.
However, there are exceptions to this general rule, including where a director has entered into a personal guarantee, they have breached their duties as a director or personal liability has arisen from their own wrongdoing whilst managing the company.
In these cases, directors can face accountability to pay damages and may be subject to fines, disqualification and even criminal liability in the most serious cases.
Piercing the corporate veil
The idiom known to the corporate world of ‘piercing the corporate veil’ refers to lifting the shield that protects an individual from responsibility in respect of a company’s liabilities. Ultimately, this means that the court is able to decide that a director is personally liable in cases of wrongdoing.
The doctrine itself is shrouded in uncertainty and the courts’ equivocal approach provides little comfort for corporate directors.
In the case of Adams v Cape Industries plc [1990] Ch 433 the court confirmed that it would not overlook the fundamental principle of a company holding a distinct juridical identity “merely because it considers that justice so requires”. In other words, the court will not base its decision to ‘pierce the corporate veil’ simply on what might be fair in the circumstances.
However, the court will disregard the corporate veil where there is impropriety in the way that a company structure is being used to conceal wrongdoing. The cornerstone case of Prest v Petrodel Resources Ltd [2013] UKSC 34 is authority for the fact that that the court does have the power to impose personal liability where a director acts dishonestly in its management of a company. Where an individual deliberately evades an existing legal obligation by interposing a company under their control, they will be held responsible.
Therefore, whilst the courts are reluctant to override the principle of a company’s separate legal identity, this will not preclude them from holding a dishonest director accountable.
If you require advice concerning a matter relating to directors’ responsibilities, or any other corporate matter, please contact us.
For more information
Company and commercial law – our legal services
Why leaving your legal documents to AI is risky business
When was the last time your business had a legal health check?
For legal advice
- Email info@hrjforemanlaws.co.uk
- Call Hitchin, 01462 457711, Welwyn Garden City, 01707 887700, Old Harlow 01279 709 100.
- Complete our contact form here