Company Wrongdoing – Understanding Director’s Responsibilities
Whether you’re just launching a new limited company, or have been a director for many years, it is never a bad time to review your obligations and what responsibilities go hand in hand with a registered directorship.
The Law Firm Group works with businesses and private clients, and knows that very often concerns about such responsibilities only arise in challenging times.
If your business has a trademark issue, is facing liquidation, or has a legal problem, directors will need to review their risk exposure and what personal consequences such a situation might have.
However, if you know from the outset what your responsibilities are, you can lead from the front with clear oversight of your liabilities as a director.
Separating Personal Liability from a Limited Company
Incorporated businesses are a separate legal entity from their owners or directors.
That does not mean that, in every case, a director cannot be found personally liable in the event of company wrongdoing.
- In tort cases, in a civil court (as opposed to a criminal case), a director might be liable for the same acts as the company.
- Courts may deem that a director has authorised, or caused an act of wrongdoing to take place.
- If a director is found to have assisted with an infringement act, such as a breach of trademark rules in a passing off claim, they may be considered personally responsible.
Case law demonstrates that if a director has created an infringement, or assisted in it then if that contribution has been above inconsequential, the court can decide to share the responsibility for making reparations to that director, as well as or instead of the company.
These laws show us why every company director must have an understanding of all critical business activities.
For example, if a company took out a significant amount of borrowing, paid dividends to a director, then entered into administration, a court may find that the director personally benefited from the loan and must contribute towards the losses from their finances.
Therefore, The Law Firm Group would always advise seeking independent, professional advice if you have any concerns, or are keen to understand any potential liabilities and what actions are available to you.
The Responsibilities of a Director in the UK
The key to having a successful, litigation-free directorship is to have a firm grasp of your responsibilities.
Of course, in the real world, most directors can’t have direct oversight of every activity of every department and every employee of their business!
Our legal teams often consult with clients who are asked to sign paperwork regularly, might not have been aware of an area of risk, and therefore feel that they cannot be held personally liable for an instance of wrongdoing.
The reality is that the law will very rarely recognise ignorance as a defence. So outside of exceptional circumstances, it is up to you to know what is happening and manage your business within the scope of your position.
You can refresh your understanding of your responsibilities at any time, but to recap:
- Constitution: Every UK limited company needs to have a constitution. Often this is created from the model articles available from Companies House. Within that constitution is the articles of association, that set out the rules for your board. We’d recommend reviewing the articles if you haven’t done so recently, which set out what your powers are
- The Success of the Business: The next key responsibility is to promote your company’s success. If you have over 250 employees and are considered a large business, you’ll need to include a report about how you have done so along with your annual statements. That means making decisions for the benefit of the business shareholders, protecting the firm’s reputation, and considering other factors such as the environment.
- Sound Judgment: Many of the decisions we all make daily are dependent on our judgement, and as a director, those choices need to be made independently. That means not delegating important decisions to others without the requisite authority, and forming your own view.
- zue Diligence: This is a phrase we often hear, but what does it mean? Due diligence is about showing skill and care in the way you work. Some directors might demonstrate this through continued professional development or generally keep aware of market conditions and company performance.
- Conflicts of Interest: Being a director has risks and rewards like any role, but it is vital to be objective when it comes to conflicts where a particular contract or job might benefit you personally. Such conflicts need to be disclosed to the board members, and sometimes also to shareholders, and you’ll also need to disclose any significant gifts. Note that you have a statutory duty to declare an interest in any pre-existing or new transactions that the business might undertake.
- Record Keeping: A widespread problem, particularly for SMEs, is not keeping records of events such as board meetings or votes. It is imperative that meetings are minuted, and the records kept for ten years. Those records protect you in the event of any wrongdoing being found, and evidence what decisions were made, by whom, and on what basis.
How Can I Ensure I Am Fulfilling my Fiduciary Duties as a Director?
Your role as a director is to manage the company on behalf of the shareholders, and you may well own shares as well as running the show!
The Companies Act 2006 outlines all the responsibilities we have explored above and is a useful reference if you are facing a problem and need to know where you stand.
If you have fulfilled all your responsibilities within the powers set out in the constitution, and have used appropriate skill, care and diligence in your work, it is unlikely that you could be held personally liable should the business have been found to be in breach of a contract or law.
It is difficult to give a broad overview of how you avoid any personal liability. Still, in most cases, this could only arise where it can be proven that you have breached your fiduciary duties to look after the shareholders’ interests.
For example, suppose you knew a business was insolvent and allowed it to continue trading, or didn’t disclose a conflict of interest before accepting a substantial business contract. In that case, this could be a more serious issue.
Should you require assistance in understanding any aspect of your director’s responsibilities, be facing a challenge related to company wrongdoing, or feel that you would benefit from professional advice from a highly experienced legal team, do get in touch!
The Law Firm Group has offices across England and are always on hand to provide sound legal advice to help you decide on the best courses of action.