Directors

Directors are in the spotlight.  We work with employers and investors looking to protect the shareholders and the company. We also work with directors individually to help protect them against unnecessary risk.

Please do call us to discuss your query. We always scope matters and provide cost estimates.

Reasons to decide to work with us

  • We solve problems relating to matters such as director service agreements and dismissal.
  • Where the director is a shareholder we can provide solutions to shareholder issues.
  • Our experience includes the management of claims brought against directors by the employer, shareholders or the Insolvency Service.
  • Our experience enables us to stay focused on the issues important to you.

Areas where we help directors

To help you see if we can help we have set out below a summary of:

  • The risks for directors;
  • Dismissing directors;
  • Warning for shadow directors.

Risks for directors

The law is deficient on the regulation of director duties.  One of the problems is that directors carry several roles:

  • Office holder director recorded at Companies House;
  • An executive serving the business in the performance of duties; and
  • Often, there can be a third role – that of shareholder.

There is often confusion between the roles and respective duties.  Non-executive directors carry the same risk as any other director.  The Insolvency Service is actively investigating directors having stepped up its surveillance.

Common problem areas involving the duty of directors

The most commonly seen problems revolve around:

  • The role and duty of a director;
  • What to do if a conflict arises;
  • How to handle a difficult director;
  • How to balance the role of director with being a shareholder.

Responsibilities for directors

The implications for directors include:

  • Personal liability; and
  • Financial responsibility.

We see issues arising around directors carrying risks they are unaware of.  However, the risks can be mitigated if  about before a problem arises and documentation covering off risks is in place.

A big problem is many shadow directors and non-executive directors think they are outside of the risks. As we explain this is not the actual case.

Personal liability

Directors are personally liable for any failure to comply with their director’s responsibilities and fiduciary duties. If you are a director, you will be expected (by a court and or the shareholders) to know what your responsibilities and fiduciary duties are.

Financial obligations of directors

If a company runs into financial difficulties, then the directors (including in some cases shadow directors, de facto directors and non-executive directors) can be held personally financially responsible. Insolvency legislation allows the creditors of a company that has been wound up to request a court to compel a director to account personally.

Directors’ fiduciary duties

A fiduciary relationship is a relationship of trust. This places a duty on directors to act within the best interests of the company, in good faith, and honestly. The duties can arise under contract, the articles and any shareholders’ agreement. The duties also arise under statute as the Companies Act 2006 sets out extensive fiduciary duties as we explain.

Director duties under the Companies Act 2006

There are seven general directors’ duties set out in the Companies Act, which are:

  • A duty to act in accordance with the powers set out in the company’s articles;
  • A duty to promote the success of the company for the benefit of its members;
  • A duty to exercise independent judgment;
  • A duty to exercise reasonable care, skill and diligence;
  • A duty to avoid conflicts of interest;
  • A duty not to accept benefits from third parties; and
  • A duty to declare to the company’s other directors any interest a director has in a proposed transaction or arrangement with the company.

Alongside the statutory duties there is what is known as the ‘code of conduct’ for directors. In a nutshell, directors have to consider the broader impact of any decision.

Fiduciary duties implied into the director agreement

The director does have various fiduciary duties which are implied into any director agreement.  The problem is the implied terms are limited.  The duties set out under the Companies Act are difficult to enforce in practice.

  • You can bolster the implied terms and statutory responsibilities by way of the director’s service agreement. The director agreement should link back to robust articles and shareholders’ agreement.  Our aim is to cut down on disputes.

Implications of a breach of the duties of the director

There are a variety of routes to consider where there is a suspected breach of a director’s duties. The best one will depend upon the circumstances and can include:

  • Removal from office; or
  • An injunction to force or stop an act; or
  • If the company will not act then the shareholders step in and act.

Dismissal of a director

You may find that the director’s service agreement deals with removal from employment as a director and the statutory office of director.

No written agreement setting out the director’s duties

However, often there is no written employment documentation. In this situation you need to consider removal of the director from employment and the second step of removal from the office of director. In law the functions are mutually exclusive.

Removal from employment

You can terminate the employment of the director. Without a written agreement you may face an argument around the appropriate notice period and claims of unfair dismissal.

Removal from office

Dismissing the director (as an employee) does not automatically mean that the director is no longer a statutory director.  Best advice is to build into the articles, shareholders’ agreement or the director’s agreement a power to force the resignation of statutory directorship if the director leaves his employment.

No written means of removal as statutory director

If you have no express contractual power to remove the director from his position as officer of the company you have to rely on the Companies Act.  The Companies Act requires an ordinary resolution – which means over 50% of the shareholders agree and you give them notice as discussed below.

If you cannot secure an ordinary resolution you can only remove the director with agreement or failing that court approval.   For this reason, dismissal should be thought about before appointment.

The ordinary resolution requirement

The shareholders can remove a director from office under the Companies Act by a majority vote, i.e. over 50% of the shareholders agree, providing:

  • The vote is given at a general meeting and not through writing.
  • At least 28 days’ notice of the general meeting is given to the shareholders of the company and the director subject.
  • The director is given the opportunity to make representations at the general meeting before the company’s shareholders.

Before any dismissal of a director you should review the company’s articles or shareholders’ agreement. This is because either or both of those documents may have extended the scope of the Companies Act provision beyond the 51% shareholder approval threshold. Often we see removal as a director a “veto right” meaning all shareholders have to support the decision.

Shareholding held by the director

Removal of the director from employment or office does not mean that the director is forced to transfer any shareholding. You can only force the transfer of shares if you have compulsory transfer rights under the articles and or shareholders’ agreement.

Employment law aspects

Employment law rights exist independently to rights under the Companies Act, articles or shareholders’ agreement.  Directors have employment law rights even if there is no written agreement.

The real reason for removing a director maybe that the directors no longer see eye to eye.  If the reason given is “unfair” the dismissal can be challenged.  If a challenge is successful unfair dismissal compensation could be claimed.  Most cases do not reach the Employment Tribunal or a court but directors do need to know if their case will be successful – our service includes the necessary assessment.

Reasons for dismissal which can be unfair

The scenarios we see most frequently revolve around facts such as:

  • Change of management – Changes the very top of a Company either as a result of a change of ownership or the appointment of a new Managing Director or CEO can often mean a change in leadership.   A change in leadership is not a fair reason for dismissal.
  • Gross misconduct – With no definition of gross misconduct, employers enjoy discretion to define what they consider as gross misconduct. However, it is clear that the conduct must include deliberate wrongdoing or gross negligence.
  • Incapability to perform role – At director level this can be difficult for an employer to make out.  Often other staff are involved and the line between under performance of one director or many soon becomes blurred.  If a director is singled out that would usually be unfair dismissal.
  • Sudden change of policy – certain perks and ways of conduct may become contractual rights through custom and practice.  A sudden removal of rights without consultation or warning can be unfair dismissal.
  • Whistle-blowing – whistleblowing is a protected disclosure and employees are protected from suffering detriment.  Employers often try to dismiss on other grounds such as poor performance, poor attitude or gross misconduct, often supported with weak or unreliable evidence.  A claim for unfair dismissal  can be brought in the Employment Tribunal with no minimum continuous employment requirement.

Some of the above, if proven, are fair reasons for instant dismissal in most people’s eyes. However, the position is usually not so clear cut.  For instance, there may be a genuine defence.

Warning for shadow directors

Some individuals exercise control over the business, without formally being appointed as directors. But, these individuals have the same responsibilities and fiduciary duties as statutory directors. They are known as shadow directors or de facto directors.  They need a director agreement as does any other director to protect themselves, the company and ultimately the shareholders.

Shadow director risks

If a shareholder claims against a shadow director, then any directors and officers’ insurance is unlikely to cover the shadow director. Not only does this impact on the shadow director, but also the company and all other directors.

By not registering the shadow director at Companies House, it is arguable that the statutory directors have breached their own directors’ responsibilities and fiduciary duties.

If you are a shadow director the best advice is to make sure you have a service agreement protecting you from liability. Also, arrange for cover under the company’s officers’ and directors insurance.

 

  • As part of an investment round, our investors wanted director agreements in place. The investors were happy with the agreements produced and expediency of their service.

  • When we faced dismissal of a director we used Gannons and they did the job. Obviously have plenty of experience.