Stephen Claus – Duties of directors of a company

Duties of directors of a company

In this blog we identify what the duties attached to a director of a charitable company are, so that directors or prospective directors might identify what their obligations under law are.  Most new charity’s established now are a company.  A director of a charitable company may be described as a Trustee.  Here we review the position under company law and then at the end of the blog is a table to compare the duties of a director with those of a charity trustee.  They remarkably close!

1. Introduction

The Companies Act 2006 (references to section numbers are references to this Act) codified seven duties of company directors that were previously only set out in common law. The duties are owed by the directors of a company to the company.

Directors of a company also have obligations to file certain documents with Companies House during the lifetime of a company.

These Companies Act duties and obligations are set out in this briefing note.

2. The Duties

Duty to act within powers (section 171)

A director must act in accordance with the company’s constitution and must only exercise his powers for their proper purpose. This duty replaces the common law principle under which directors must act within the powers conferred on them by the company’s memorandum and articles and exercise their powers for proper purposes.

A company’s constitution is widely defined, to include:

• The company’s Articles;
• Decisions taken in accordance with the Articles and other decisions taken by the members or a class of them if they can be regarded as decisions of the company;
• Any resolutions and agreements affecting a company’s constitution.

Duty to promote the success of the company (section 172)

Section 172 provides that a director must 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 (or beneficiaries) as a whole. In so doing, the director must have regard (among other matters) to:

• The likely consequences of any decision in the long term.
• The interests of the company’s employees.
• The need to foster the company’s business relationships with suppliers, customers and others.
• The impact of the company’s operations on the community and the environment.
• The desirability of the company maintaining a reputation for high standards of business conduct.
• The need to act fairly as between the beneficiaries of the company.

The duty is subject to any enactment or rule of law requiring directors in certain circumstances to consider or act in the interests of the creditors of the company. Accordingly, the duty is displaced when the company is insolvent, and may be modified by an obligation to have regard to the interests of creditors as the company nears insolvency.

Duty to exercise independent judgment (section 173)

A director must exercise independent judgment. The duty will not be infringed by a director acting in accordance with an agreement entered into by the company that restricts the future exercise of the directors’ discretion or in a way authorised by the company’s constitution. It follows that any powers of delegation should be set out in the articles.

This duty will not prevent directors relying on advice, as long as the directors exercise their own judgment in deciding whether or not to follow the advice.

Duty to exercise reasonable care, skill and diligence (section 174)

A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both:

• 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 (the “objective” test);
• The general knowledge, skill and experience that the director actually has (the “subjective” test).

As a minimum, a director must display the knowledge, skill and experience set out in the objective test, but where a director has specialist knowledge, the higher subjective standard must be met.

Duty to avoid conflicts of interest (section 175)

Under section 175, a director must avoid situations in which he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests.

Duty not to accept benefits from third parties (section 176) 

Under section 176, directors must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director.

Duty to declare interest in proposed transaction or arrangement with the company (section 177)

Under section 177, directors must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. An interest of another person in a contract with the company may require the director to make a disclosure under this duty, if the other person’s interest amounts to a direct or indirect interest on the part of the director.

The declaration must be made before the company enters into the transaction or arrangement.

Where a declaration of interest proves to be, or becomes inaccurate or incomplete, a further declaration must be made, if the company has not yet entered into the transaction or arrangement when the director becomes, or should reasonably have been, aware of the inaccuracy or incompleteness.

3. Filing / accounting obligations

Annual Return (Form AR01)

An Annual Return is a snapshot of certain company information. It is a separate document from a company’s Annual Accounts. An Annual Return must contain the following information:

• the name of the company;
• its registered number;
• the date to which the annual return is made-up (the made-up date);
• the principal business activities of the company;
• the type of company it is, for example, private or public;
• the registered office address of the company;
• the address where the company keeps certain company records if not at the registered office, and those records held there;
• the details of the company secretary, where applicable; and
• the details of all the company’s directors.

Every company must deliver an Annual Return to Companies House at least once every 12 months.

The company’s directors and the secretary (where applicable), are responsible for ensuring that they deliver the Annual Return to Companies House within 28 days after the anniversary of incorporation of a company or of the anniversary of the made-up date of the last annual return.

If you do not deliver the company’s annual return, the Registrar might assume that the company is no longer carrying on business or in operation and take steps to strike it from the register.

Accounting records

Every company, whether or not they are trading, must keep accounting records. Accounting records must in particular contain:

• entries showing all money received and expended by the company;
• a record of the assets and liabilities of the company.

A company must keep its accounting records at its registered office address or a place that the directors think suitable. The records must be open to inspection by the company’s officers at all times.

Private companies must keep accounting records for 6 years from the date they were made.

Annual Accounts

The directors of every company must prepare accounts for each financial year. A company’s first accounts cover the period starting on the date of incorporation and end on the accounting reference. Subsequent accounts start on the day after the previous accounts ended and finish on the accounting reference date.

Every company must send a copy of its annual accounts for each financial year to:

• every member of the company;
• every holder of the company’s debentures;
• every person who is entitled to receive notice of general meetings.

The company’s board of directors must approve the accounts before they send them to members etc.

All companies must file their accounts at Companies House.

If you are filing your company’s first accounts and those accounts cover a period of more than 12 months, you must deliver them to Companies House:

• within 21 months of the date of incorporation;
• 3 months from the accounting reference date, whichever is longer.

The deadline for delivery to Companies House is calculated to the exact day.

Unless you are filing your company’s first accounts (see above) the time normally allowed for delivering accounts to Companies House is 9 months from the accounting reference date.

Failure to deliver accounts on time is a criminal offence. In addition, the law imposes a civil penalty for late filing of accounts on the company. The amount of the penalty depends on how late the accounts arrive.

COMPARISON BETWEEN THE DUTIES OF DIRECTORS AND CHARITY TRUSTEES

 

DIRECTORS DUTIES	DUTIES OF CHARITY TRUSTEES
Duty to act within powers	·       Ascertain trusts and trust property   ·       Exercise powers in the best interests of the present and future beneficiaries   ·       Only use powers for the legitimate purposes of the trust   ·       Comply with the terms of the trust
Duty to promote the success of the company	·       Primary duty to act only in the interests of the charitable objects   ·       Guided by a desire to promote the lasting interests of the charity
Duty to exercise independent judgment	Fulfil duties and exercise powers fairly, honestly and with absence of indirect motive
Duty to exercise reasonable care, skill and diligence	·       Exercise such care and skill as is reasonable   ·       Conduct business of trust as an ordinary prudent person with business experience would conduct their own
Duty to avoid conflicts of interest	Duty of loyalty
Duty not to accept benefits from third parties	Duty to act gratuitously
Duty to declare interest in proposed transaction or arrangement with the company	Duty not to ever permit personal interest to conflict with trusteeship and to act accordingly

Stephen Claus.

These are the views of Stephen Claus, and therefore does not constitute individual legal or financial advice, this article is for information only. If you require guidance or advice, please get in touch.