At the helm of a company, and purporting to represent and advance the interests of its shareholders, directors have many, important duties and responsibilities. Beyond civil actions for infringement of these duties, directors can also be subject to criminal sanction for certain conduct.
Considering the consequences for directors, the company and confidence of investors, it is paramount to seek the advice of a corporate solicitor in order to properly navigate the course of business while maintaining a sound relationship between these three groups, and keeping operations within the law.
What are directors' duties and liabilities?
In the UK, directors are subject to a number of statutory duties, including fiduciary duties, to their company such as:
- exercising reasonable care, skill and diligence in the performance of their duties;
- refusing material benefits from third parties;
- avoiding self-dealing;
- avoiding conflict of interest;
- exercising independent judgement; and
- acting only within the powers prescribed by the company’s constitutional documents.
Where a director is found to be in breach of these obligations, they may be sanctioned through measures such as restitution of material profits, accounting, injunctive relief and pecuniary damages.
What are the restrictions on self-dealing?
A director is subject to statutory restrictions regarding the way they can transact with their company. Borrowing money is prohibited, as well as substantial property transactions. It is possible for a service contract to exist between a director and a company, but it cannot be for a guaranteed term beyond two years.
What are conflicts of interest?
Under the Companies Act, directors are proscribed from entering transactions that invoke actual or potential personal interests that conflict in any way with those of the company. Where a conflict of interest arises, directors must disclose their personal interest to the company, whereupon it can be approved by non-interested board members.
What disclosures are required?
Directors hold the chief responsibility for the production of a company’s accounts, including assets, liabilities, profits and losses, on demand by shareholders. When handling information, directors owe a duty of confidentiality to their company in the course of their functions. Conversely, directors are subject to disclosure requirements when receiving payments, which are scrutinised for consistency with shareholder-approved remuneration policies.
What are the potential criminal sanctions against directors?
A director can be criminally prosecuted for theft, bribery or fraudulent activity, including misleading creditors. Under the Financial Services Acts, if a director makes a knowing or recklessly misleading, false or deceptive statement for the purpose of selling or buying securities, they can be subject to prosecution. Further, criminal sanction may arise from environmental offences, health and safety violations, competition law and data protection.
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