MJ O'Connor Solicitors

Years ago to be a director was seen to be a much envied position but as many people who are in that position realise, the rewards have to be balanced against the duties and responsibilities imposed by law. The source of these duties can be found at common law (which is based on case law decided over the years), equity (as in “what is equitable” or “what is fair in the circumstances”) and in the Companies Acts 1963-2006. Brendan Curran solicitor focuses the spotlight on this topic and explains how much needed clarity will be introduced by the Companies Bill 2008.

 

Every private limited liability company, even a single member company, is required to have two directors and a company secretary (an existing director can also act as a company secretary). The details of the directors are required to be filed with the company registration office (CRO) and thus it is open to the public to find out exactly who is the director of a specific company. However, it is possible for a person to be a director even though they are not formally appointed and examples of these are “shadow” directors and “de-facto” directors.

 

Shadow directors are persons, in accordance with whose instructions the directors of a company are accustomed to act. Such directors are not unlike puppet masters. De-facto directors are persons who have not been validly appointed or who are disqualified but who occupy the position of, and act as if they were, directors. Such persons bear all the responsibilities of a director and cannot seek to escape liability simply because they were not formally appointed as a director.

 

Executive directors are directors who are involved in the day to day running of the company while non-executive directors are usually not involved in the day to day running of the company and are appointed due to their knowledge or skill in a particular area. However, this distinction is a commercial distinction and not a legal distinction. They are each subject to the same legal responsibilities, as set out below.

 

There are three general principles enunciated in cases around the turn of the 20^th Century which established the core duties applicable to directors of today’s modern companies, whether a small family run company or a publicly listed company.

 

Firstly, is the principle that a director must act in good faith and in what he considers to be the best interests of the company as a whole and will be held to be in breach of duty where he or she promotes the interests of a third party.

 

Secondly, directors must not use the company’s property, information, or opportunities for his own or anyone else’s benefit unless he is authorised to by the company’s memorandum and articles of association and it has been disclosed to the members and they have passed an ordinary resolution consenting to it. In the Canadian case of Canadian Aero Services Ltd v O’Malley two directors of a company had been in negotiations on behalf of the company for a large aerial survey and mapping contract. However, instead of securing the contract for the company of which they were directors, the two directors resigned and obtained the contract for a new company which they had formed for the purpose. The court had no hesitation in holding the directors personally liable in damages to their former company.

 

Thirdly, directors are obliged to carry out their functions with due care, skill and diligence. There is a caveat to this duty in that a director need not to show a greater degree of skill than would reasonably be expected from a person of his/her knowledge and experience. This essentially means that the more experienced and qualified a director is then the higher the standard of case that is required from him/her in the exercise of his duties.

 

A director is entitled to delegate his/her functions to other persons in the company where such duties may properly be left to such persons, having regard to the articles of association of the company and the nature of the company’s business. However this does not absolve a director with regard to the running of the company’s affairs and delegation of powers does not allow a director to abdicate his responsibility with regard to those functions. It is important for directors to retain a sufficient knowledge and understanding of the company’s business in order to discharge their duties. Furthermore, a non-executive director is not bound to give continuous attention to the affairs of the company but should attend meetings where save for exceptional circumstances.

 

More good news is that a director does not need to have any specific qualifications and thus, as one learned scholar put it “they may be as thick as two short planks”. However, while in theory this may be true, in reality where a person accepts office as a director he or she undertakes the responsibility of ensuring that he/she understands the nature of the duty which they are called upon to perform. Directors shall be careful to ensure that they do not hold themselves out as having a particular experience or skill which in fact they do not possess.

The bad news is that over the years the courts and the legislature have recognised that the duty of a director not only extends to the company but to employees, members and in the case of insolvency, creditors. The duty of a director to have regard to an employee was put on a statutory footing by Section 52 of the Companies Act 1990. Unfortunately for the employees the only person who can bring an action against a director where he/she has disregarded the interests of a company’s employees is the company itself, being represented either by a majority of the members in general meetings or by a liquidator.

 

With respect to creditors, a number of recent Irish cases have held that where a company is insolvent, even if not in liquidation, then the directors of that company will owe a duty to the company’s creditors. The reasoning behind this is clear, when a company is insolvent; the rights of creditors come to the fore and must be considered when making any payments out of the company’s assets. The case of Re Frederick Inns Ltd is a good example of where the interests of creditors may intrude on the duties of directors. In this case the directors made payments to the Revenue Commissioners not only for the company’s debt but also for the debts of other companies within the group. The court held that such a payment was in breach of the directors’ duties to the general creditors of these insolvent companies and the directors incurred personal liability accordingly.

 

Of course all of the above common law duties are in addition to the numerous statutory duties imposed on directors as set out in the Companies Acts 1963-2006. It is not possible to go into detail as to the various statutory duties of directors but some examples include:

 

·        Duty to maintain proper books of account

·        Duty to prepare annual accounts

·        Duty to maintain certain registers re members, directors etc.

·        Duty to file certain documents with the Companies Registration Office

 

In response to the recommendations of the Company Law review group the Companies Consolidation Bill 2008 will place directors’ duties on a statutory footing, which in the author’s opinion is a much welcomed improvement. The Bill provides:-

 

(1)               Without prejudice to the provisions of any enactment (including this Bill) a director of a company shall owe the duties set out in Head 3 to his company (and the company alone), which shall be enforced in the same way as any other fiduciary owed to a company by its directors.

 

(2)               The duties set out in Subhead (3) are based on certain common law rules and equitable principles as they apply in relation to the directors of the companies and shall have effect in place of those rules and principles as regards the duties in Subhead (3) 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 duties set out in Subhead (3).

 

 

 

 

(3)               Every director of a company shall-

 

(a)    act in good faith in what the director considers to be the interests of the company;

 

(b)   act honestly and responsibly in relation to the conduct of the affairs of the company;

 

(c)    act in accordance with the company’s constitution and must exercise his powers only for the purposes allowed by law;

 

(d)   not use the company’s property, information or opportunities for his own or anyone else’s benefit unless he is allowed to by the company’s constitution or the use has been approved by a resolution of the company in general meeting;

 

(e)    not to agree to restrict the director’s power to exercise and independent judgement unless this is expressly permitted by the company’s constitution and provided that if the director considers in good faith that it is in the interest of the company for a transaction to be entered into and carried into effect, a director may restrict the director’s power to exercise an independent judgement in the future by agreeing to act in a particular way to achieve this;

 

(f)       avoid any conflict between the director’s duties to the company and the director’s other, including personal, interests and may not retain any benefit derived from any engagement (other than a transaction or arrangement to which the director and the company are party) where there is such conflict of interest unless the company’s members in general meeting release the director from his duty to the company;

 

(g)    owe the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both:

 

(i)             the knowledge and experience that may reasonably be expected of a person in the same position as the director, and

 

(ii)            the knowledge and experience which the director has; and

 

(h)    have regard to the interests of the company’s employees in general and to those of its members.

 

4.             A director appointed or nominated for appointment by a member with an entitlement to so appoint or nominate under the constitution or a shareholders’ agreement, may have regard to the interests of that member.

 

The provisions address the problems of the inaccessibility and incomprehensibility of director’s duties by setting out in general terms what director’s duties are. The provisions also bring much needed clarity to the position of directors and so called “nominee directors” who are appointed at the behest of shareholders and other shareholders. Finally it must be noted that the provisions set out the general duties of directors and thus are not intended to be exhaustive and it is important that all directors keep up to date on their company law obligations.

 

Brendan Curran

M J O’Connor Solicitors

Waterford and Wexford

www.mjoc.ie e-mail: bcurran@mjoc.ie