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COMMON TYPES OF CORPORATE AGREEMENTS

Company’s Constitution Founders’ AgreementShareholders Agreement Share Subscription AgreementsTerm Sheets Share Purchase Agreement Business Sale & / Assets Agreement Directors’ Service AgreementTypes of Resolutions : Directors Resolutions & Members Resolutions ______________________________________________________________________________ Company’s Constitution A Company Constitution is a…

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Directors' duties

The previous defined the various types of directors. This blog looks at what duties they owe to the company (and in some cases third parties).

Directors duties

Directors duties can be split into three categories:

Fiduciary/legal duties;

Common law duties; and

General duties under the Companies Act 2006 (which have in theory replaced the above)

Fiduciary duties

Duty to act in good faith and in the best interests of the company (replaced by s172 CA 2006)

A director has to act at all times in good faith in what he considered is the best interests of the company.

Duty to act within the powers conferred by the company’s memorandum and articles of association and to exercise powers for proper purposes (replaced by s171 CA 2006)

A director may not cause the company to take on activities outside that allowed by the company’s constitutional documents (articles and memorandum), or use his powers for any ‘improper purpose’.

Duty not to fetter one’s discretion

A director cannot restrict himself from exercising independent decision making on the company’s behalf.

Duty to avoid conflicting interests and duties

A director must not place himself in a position where there is a conflict, or possible conflict, between the duties which he owes to the company and either his personal interests or other duties which he owes to a third party.

Duty not to make unauthorised profits

A director is under a duty to account for any personal profit he has made unless the profit was approved by the shareholder or was in line with the company’s articles.

Common law duties (codified by S174 CA 2006)

Common law duties are based on the level of skill and care that is required from directors when exercising their role as director.

The case of Re D’Jan of London Ltd [1994] 1 BCLC 561 held that the standard of care required from directors was identical as that required by the test in s.214(4) Insolvency Act 1986. This section states:

“..the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person, having both:

(a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b) The general knowledge, skill and experience that that director has.”

Directors should be careful when taking on a directorship ensuring they are sufficiently qualified or experienced to fulfil the role they will be required to fulfil. The higher qualified the director, the higher level of skill required from him.

Directors also owe a duty of care to the company.

Duties under the Companies Act 2006

In theory the duties under sections 171 – 177 of the Companies Act 2006 (CA) have replaced the fiduciary and common law duties stated above. However, s170 of CA states

“The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”

What are the duties owed by a director under CA 2006?

S171 Duty to act within powers

A director of a company must act in accordance with the company’s constitution and must only exercise powers for the purposes for which they are conferred. Section 171 replaces the fiduciary duty to act within the powers conferred by the company’s memorandum and articles of association and to exercise powers for proper purposes.

S172 Duty to promote the success of the company

Section 172 requires a director to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.”

The above list is not conclusive and it should be noted that the duty to exercise reasonable skill, care and diligence will apply to the list. Section 172 replaces the fiduciary duty to duty to act in good faith and in the best interests of the company.

S173 Duty to exercise independent judgement

This duty codifies the principle of law under which directors must exercise their powers independently and replaces the fiduciary duty not to fetter one’s discretion.

S174 Duty to exercise reasonable care, skill and diligence

This section has an objective and subjective test, at the minimum the director must meet the objective test.

Under section 174, a director must exercise reasonable care, skill and diligence “that would be exercised by a reasonably diligent person with:

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and [objective test]

(b) the general knowledge, skill and experience that the director has. [subjective test]

S175 Duty to avoid conflicts of interests

For situations arising before 1 October 2008 the fiduciary duty to avoid conflicting interests and duties will still apply. For situations after this date section 175 applies.

Under section 175, a director must avoid situations in which he has, or can have, a direct or indirect interest that conflicts, or may conflict with, the interests of the company. This duty applies in particular, to the exploitation of property, information or opportunity (regardless of whether or not the company could take advantage of the property, information or opportunity).

This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

The duty under section 175 is not infringed if either, the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the matter has been authorised by the directors.

S176 Duty not to accept benefits from third parties

Section 176 provide that a director must not accept a benefit from a third party, (a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate), conferred by reason of his being as director or, his doing (or not doing) anything as director.

The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Benefits conferred by the company, or its group, and benefits received from a person who provides the director’s services to the company, are not regarded as conferred by a third party.

S177 Duty to declare interest in proposed transaction or arrangement with the company

For situations arising before 1 October 2008 the fiduciary duty that directors may not have an interest in a transaction with the company unless the interest has been authorised by the members will still apply. For situations after this date section 177 applies.

If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, there is a requirement under this section to declare the nature and extent of that interest to the other directors. The declaration must also be made before the company enters into the transaction or arrangement.

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Sole Trader vs Limited Liability Company: Pros and Cons.

Starting up in business? Already in business and thinking of changing to a Limited Liability Company and don’t know if you should? Bernadette McGrory Farrell of W.O.McGrory & Co has set out below the pros and cons to help you decide. What is a sole trader? A sole trader is a business owned and controlled by one person, generally trading under his/her own name or using a registered business name. If the business owner decides not to trade under his/her own name it is necessary to register the business name with the Registrar of Business Names. There is a small fee attached to this registration but otherwise it is a very simple process. Advantages of trading as a sole trader: 1. It is much less onerous in terms of structure and formalities to set up. 2. There is no requirement to file annual accounts other than when required as proof of income for income tax purposes. 3. Closure of the business is equally easier to effect. Disadvantages of trading as a sole trader: 1. The owner is personally liable for all the debts of the business. 2. Because ownership rests with one person, raising capital can be more difficult. Many businesses find it necessary to become Limited Companies as they grow to facilitate further growth and development. 3. The profits of the business are considered personal income and used in the calculation of income tax liability which is taxed at higher rates than Corporation Tax for Limited Companies. What is a Limited Liability Company? A Limited Company is a separate legal entity from the people who operate and control it. The owners are shareholders in this legal entity. The Company has Directors who make decisions on behalf of the Company. The Company itself has sole responsibility for all the debts of the Company, which are restricted to the paid-up share capital of the Company, hence the term Limited Liability. Advantages of trading as a Limited Liability Company: 1. The shareholders are only liable to lose the share capital they have invested in the company. 2. Raising Capital to fund growth and development can be easier. 3. There may be many owners of the company, and it continues to exist despite the death, retirement or resignation of the Directors. 4. The Company can make pension contributions as an expense. Disadvantages of trading in a Limited Liability Company: 1. In practice, lenders generally seek to have personal guarantees against loans given, which reduces the benefit of limited liability. 2. Setting up a company is more expensive than trading as a sole trader. 3. Legislative requirements in making annual returns to the Companies Registration Office are more onerous. Annual Accounts must be filed with the Companies Registration Office also. 4. Company Directors are subject to extensive legal responsibilities, including being made personally liable for all the debts of the Company if they are proven to have traded recklessly. For further advice or information contact our Drogheda office or our Clondalkin office or call (041) 9836707 and we will chat through your options with you.

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