Specialist legal advice for directors

Directors operate in a complex world where their responsibilities, the extent of responsibility and liability for non observance are usually not clear.  For example:

• Directors have legal duties and responsibilities to their employees and face claims from employees for failures. Directors are often also employees so have their own personal duties as employees;
• Directors have to keep control of the company’s finances and face personal liability for trading whilst the business is insolvent;
• Directors owe a duty to their shareholders to promote the business. In practice this is a wide legal responsibility. Directors can be made to account for secret profits;
• Directors have fiduciary duties which includes a duty of good faith and to avoid conflicts of interest. Disclosure can get around that problem in practice.
• Many directors are also shareholders. Disputes between shareholders and disputes between directors are common and fraught with difficulty.
• Some directors do not work in the business on a day to day business but can face legal liability if things happen ijn then business which directors are under legal duties to prevent, such as bribery,

We have only picked out the most common areas we see causing difficulty but there are other duties placed upon directors.

Is there any protection for directors against legal risk?

A director is responsible for the day-to-day operations of the company – directors represent the shareholders. But they are often also employees themselves and shareholders with competing interests. If the director is a shareholder it is established that the director can put his shareholding interests first.  That leaves many areas where directors can be open to claims such as:

• Becoming caught between the interaction between protecting the director’s personal interests as employee and the obligations placed on directors under common law and under statue.
• Facing attempts to extend accountability to areas over which the director has no control?  For example if there has been fraud who is accountable?
• Whistleblowers.

How can specialist legal advice help?

In practice the protection for directors may be found:

• By examining the extent of obligations for the director set out under any director agreement.
• The disclosure requirements for directors set out in the articles or shareholders’ agreement.  If a conflict has been disclosed,  approved and recorded as part of the minutes it is no longer a conflict.
• Looking to see if restrictions the company is seeking to impose on the director are legally enforceable. Unreasonable restrictions will be seen as a restraint of trade and not be enforceable even against directors.
• Reviewing has the director acted prudently and taken steps a reasonable director can be expected to take with the knowledge he or she had at the time.

When can a director be made personally liable? 

Whilst directors are generally well protected against liabilities against the company they represent by the “corporate veil” there are a number of areas where personal liability can arise.

We do advise directors about these risks, how to mitigate against them and if claims arise, their best options, both legally and tactically. Areas to watch out for include :-

• Risks of wrongful or fraudulent trading if the business is in financial difficulties;
• Personal guarantees  for company borrowings that may have been given where the director is also a significant shareholder;
• Breach of authority – where the director may have exceeded authority when dealing with a third party;
• HMRC have powers to impose personal liability for failure to pay tax.

For how long does the legal responsibility for directors last?

A director’s duties begin on the date s/he is appointed, and most obligations cease on termination. There are two exceptions in which duties continue after the directorship comes to an end. Former directors continue to be required to:

• Avoid conflicts of interest as regards the exploitation of any property, information or opportunity of which they became aware at a time when they were a director; and
• Not accept any benefits from third parties as regards things done (or not done) before they ceased to be a director.

These continuing duties prevent former directors from exploiting for their own gain any property, information or opportunity which they acquired or discovered while being a director of the Company.

Who can sue a director?

The company can bring claims against its directors and former directors.  For example, if it is alleged that a director has breached his or her duty of good faith by say setting up or joining a competing business the company can bring the claim and pay the costs.

Bringing an action for failing in duty as a director can be a particular problem for smaller companies, especially those with only two directors who are also shareholders as there is not the majority required for a decision. Where there are only two directors the most common step is for the court to order a winding up of the company as it is deadlocked. In practice we find we can avoid such draconian action by negotiating a deal.

Shareholders can take legal action against a director in certain circumstances but such claims are never straightforward and are not surprisingly rare.

With insolvency, claims against directors can be brought personally by a liquidator, typically for wrongful or fraudulent trading.