Directors' Duties and How to Comply With Them?
Directors are responsible for the management and day to day running of a company. They are, however, restricted in their powers and owe several duties to the company under the Companies Act 2006 (Act).
These duties apply to all directors, which means they cannot simply do as they wish. A recent case had to decide if the directors in question had broken their duties owed to the company.
Was There a Breach of Certain Duties in the Act?
The relevant company was on the brink of administration. A major shareholder decided it was best for two directors to be removed, enabling the shareholder in question to gain control of the board and steer the company away from administration. The shareholder called a shareholders' meeting which was part of the legal process for removing the directors. Before this meeting could take place, the same two directors issued shares to a new investor and agreed that the new investor would vote against the resolutions to remove them.
The investor voted and the resolutions were defeated. However, the company then went into administration, despite the attempts of the directors. The company and its liquidators argued that the directors had breached their duties owed to the company.
The court held that the company had not successfully proved that 'but for' the breaches, the company would have avoided administration.. Administration seemed to be inevitable regardless of their actions. The court did however, confirm that despite the directors not being directly responsible for the company going into administration, they did breach certain duties in the Act.
Have the Directors Breached Duties Owed to the Company?
One of these duties requires a director to act in accordance with the company's constitution (rule book) and only to exercise his powers for the purposes for which they are conferred. Another duty obliges a director to promote the success of the company for the benefit of the shareholders as a whole. In this case, it was clear that the directors were not primarily concerned about the success of the company, and instead were more focused on influencing the voting at the meeting so as to maintain power over the management of the company. Therefore, the directors did breach their duties owed to the company.
Always Consider Your Duties as a Director
As you can see from this case, the court will look at exactly what motivates a director to make a certain decision. It is therefore always advisable for directors, before making any decision on behalf of a company, to consider their duties and also to ensure that the minutes of the relevant board meeting clearly document the basis on which the directors make such decision.