Directors have significant responsibilities and duties. Appointment as a director should not be undertaken lightly. Directors can be held liable where they act as mere nominees or simply sign documentation put before. It is not generally an excuse that a director relies on a fellow directors’ good faith.
Because the directors control the company, they are in a position to cause it to act in their interests, rather than the company’s interest. They can cause the company to enter contracts favourable to themselves. They can divert assets and take personal advantage of the company’s business opportunities. For this reason, the law imposes on them, a duty to act in good faith.
Directors must exercise their powers in good faith, in the best interests of the company, as they honestly determine. Directors must use their powers for the benefit of the company. They owe a duty to the company, to act in good faith and in the interests of the company as a whole. A director may not contract with a third party to exercise his functions in a particular way.
The director’s duty to act in the interests of the company means that he must not simply act in the interests of the shareholder who may have appointed him. He must act in the interests of the company as a whole. This position has been modified to some extent by the 2014 Act, which allows for the appointment of nominee directors.
The 2014 Act codifies directors’ duties. The Act provides that the duties are based on common law rules and equitable principles as they apply in relation to the directors of companies. The codified duties have effect in place of those rules and principles, as regards the duties owed by a director to a company.
The statutory formulation of the duty must be interpreted and applied in the same way as the earlier common law rules or equitable principles. Regard shall be had to the corresponding common law rules and equitable principles, in interpreting the duties and applying the provisions.
The following parts deal with the common law position. The statutory duties, which largely restate the common law and equitable principles, are set out in a separate section. The principles applicable in common law and equity cases remain relevant in the application of the statutory duties.
To Whom Duties Are Owed I
Directors owe duties to their company. The statutory formulation restates this principle. The duties are owed to the company as a whole, rather than individual shareholders. They can be enforced by the company alone. Exceptionally, the shareholders may be permitted by the court to take action on behalf of the company by way of the derivative action.
Legal action may be taken against a director by the company in the usual manner in an ordinary action for damages for breach of duty. A director may be liable to the company and have to compensate it for the loss sustained by his negligence. Negligence may arise where the director does not meet the standard required of a reasonable and skilled director in his position.
Where directors have been found to have acted in a manner which was not in good faith, in the interests of the company, the relevant transaction may be set aside. This may occur, for example, where directors issue shares to themselves or persons connected with them, to the detriment of the existing shareholders. The transaction can be unwound in accordance with restitutionary principles.
To Whom Duties are Owed II
The Companies Act provides that companies are to have regard to the interests of employees in general. The duty is owed to the company only. The employees have no means of enforcing this duty.
Where the company is insolvent, the creditors are effectively entitled to the net assets of the company. In this case, the directors must in effect, act in the interests of the company’s creditors. The courts have held in a number of occasion’s that where the company is insolvent, the fiduciary duties are effectively owed to the creditors collectively.
Where a company is being wound up, liquidators may (and often do) take proceedings against directors to recover monies and benefits improperly received by the directors in breach of their obligations. In a winding up, an application may be made to the court to compel any director who has misapplied, retained or is accountable to the company for monies, to repay the monies concerned, by way of summary proceedings.
Duty of Care I
Directors owe a duty to act with due care and skill in the exercise of their office. The duty is to act with the degree of competence and skill that a person of their knowledge and experience, should possess. Therefore a director who is an expert in a particular area owes a higher duty than a non-expert.
A director is not usually liable for mere errors of judgment or for what in hindsight appears to be an error. The duty to act with due care does not imply a guarantee that the company will not lose. However, where the decision or course of action falls below the standard that would be required of a reasonable director in an equivalent position, he may be held liable.
Directors are bound to give due attention to the company’s business. The extent of this duty depends on the circumstances and on the type of directorship. An employed managing director will have more extensive duties than a non-executive director. He will usually be obliged to give his full attention to the affairs of the company during working hours.
Duty of Care II
Directors are obliged to attend meetings of the board, though not necessarily every meeting. Directors may be entitled to rely on others within the company. However, they cannot abdicate their duty to take care by relying exclusively on others.
A director is not necessarily expected to give continuous attention to the business of the company. Less may be expected of a non-executive or part-time director. He will not be held to the same duty of care or competence, which a full-time director with particular knowledge and experience might be expected to exercise.
A director may delegate and leave the business of the company to an official or executive if the constitution/articles so allow and the nature of the relevant business so requires. However, the director might be liable for breach of duty, in entrusting responsibilities to a person about whom there are suspicions or to whom it would be careless to appoint to the position concerned.
Fiduciary Duties of Directors I
The position of directors differs from that of shareholders. Shareholders may generally act in their own interests. Directors do not have this freedom. Directors must use their powers for a proper purpose. If they use their powers, improperly their subjective belief that it is in the best interests of the company is not a defence.
Fiduciary duties are designed to ensure that directors do not take advantage of their position. The directors must act in good faith in the best interests of the company in their dealings. They must avoid conflicts of interest. If they have an interest in a transaction, they must declare it to the company. It should be approved by independent persons within the company, where possible. They should not vote on the matter.
Fiducuary Duties of Directors II
The fiduciary duties owed by directors to the company are similar, although less exacting, than those owed by trustees. The obligation to act in good faith will generally suffice.
Directors must account to the company for benefits which they obtain, which belong properly, to the company.Where a director receives a benefit by reason of an opportunity that arose in the course of his office, which properly belongs to the company, he must hold it in trust for the company.
This is so, even if the company would not necessarily have taken up the opportunity or benefit itself. The director need not have acted dishonestly. He must account for a profit made, even if the company has suffered no loss unless full particulars of the matter have been disclosed to and approved by (independent parties within) the company.
Secret Profit / Business Opportunity
Directors may not benefit themselves in the way in which they exercise their functions. The duty to act in good faith includes a duty to avoid conflicts of interests. They cannot, for example, use their powers to secretly advance their own interests, at the expense of the company.
Where a director receives a benefit to which the company is entitled, he is obliged to account to the company for the benefit. The director must hold the benefit on trust for the company. Where, for example, a business opportunity comes along, even one which the company would not itself have the funds to undertake, the director must account to the company, for any profit which he thereby makes.
The duty to avoid conflicts of interest means that the director may not make a secret profit, at the company’s expense. A director must account for any un-approved profits which he makes in the course of his office, to the detriment of the company. If the profit arises from information gained in the context of his office, it is presumed to belong properly to the company.
Potential conflicts of interest may arise in the context of a proposed takeover. The directors may believe in good faith that it is in the interests of the company that the takeover should happen or not happen. Provided they act in good faith in what they honestly believe to be the interest of the company, they will generally fulfill their duties.
Approval by Company
The general principle (much diluted) is that a director who enters a contract with his company risks breaching his fiduciary duties by reason of the potential conflict of interest. However, if the members approve the contract or where the constitution/ articles of association authorise the transaction or arrangement, then the contract may be entered.
The default provisions / standard articles permit transactions with a director, provided that he discloses his interest and does not vote in relation to the transaction or count in the quorum for the directors’ meeting. The director must disclose his interest in the proposed contract or arrangement at the relevant meeting. If he later becomes interested in the matter, it must be disclosed as soon as possible.
A director may be entitled to proceed with a business opportunity, which arises in the course of his office, where the company’s shareholders or independent directors approve the transaction.
It is not necessarily enough for the director to proceed with a business opportunity, that he obtains the consent of the majority of the members in general meeting. If he is or is connected with the majority and uses this position to cause the company to approve the transaction, this may be a fraud on the minority. In this case, a ratification, approval or release from the general body of shareholders will not suffice.
The position is usually different if the directors and shareholders who approve the transaction, are independent of those who benefit from it. The approval should be by independent shareholders after full disclosure.
Disclosure of Interests I
The Companies Act obliges directors to disclose their interest in a proposed contracts to the board of directors. The disclosure must be made when the matter is first considered at board level. If the director later becomes interested in the matter, the disclosure must be made as soon as possible at the first meeting thereafter. Where he becomes interested after the event, it must be made at the next meeting.
Special disclosure obligations apply to loans, quasi-loans, credit transactions, guarantees and securities given to or for directors or shadow directors or persons connected with them. “Connected” persons include relatives, companies under his control and others.
If the director is a member of a specified company or firm, he is to be regarded as interested in any contract made with that company or firm. If he is connected with a particular person, he is to be regarded as interested in every contract made with that person thereafter. Prior notice of the interest or connection suffices as disclosure for the purpose of later transactions.
Disclosure of Interests II
A register of declarations must be kept by the company. Copies of the declarations by directors in respect of their interest must be set out in a book kept for that purpose. The requirement also applies to shadow directors.
The declarations must be given and entered within three days. It must be open for inspection free of charge, to the directors, members, and others at the registered office. It must be open to inspection and on request. It must be available at the general meeting and any directors meeting where it is required.
The failure on the part of the director to comply with the above disclosure obligation is an offence. Shadow directors must give notice before the meeting at which they would have been required to make a declaration if they were formally registered as a director.
Personal Liability for Offences
Directors can be convicted personally for many offences for breach of the Companies Act. In many cases, a director in default in relation to the particular matter may be convicted of an offence. The company itself may also be convicted. A defence is commonly available, provided that the director shows that he acted honestly or reasonably in relation to the matter. The wording of the legislation will determine the position.
In the case of most regulatory legislation, the legislation which creates the offence provides that any director, officer or manager who consents to, participates in, ratifies or approves the particular act, may be prosecuted for the offence. A company cannot be used as a shield from criminal liability.
The directors or others who consent to, connive at or approve the offence, are typically guilty of a separate offence. Where an offence is committed by the company, each of them and the company may be prosecuted separately. Each may be independently guilty of a separate offence. Each may be prosecuted independently or in conjunction with the company. The wording of the particular statutes varies and will govern the position.
Indemnity by Compant to Directors
The general principle is that an agent is entitled to be indemnified in respect of liabilities incurred in the course of his duty. Company constitutions/ articles often exempt and relieve a director from liability for losses caused to the company, other than those due to willful default or dishonesty.
The Companies Act provides that an indemnity to a director or release is void, except in relation to liability incurred by the director in defending criminal or civil proceedings in which he succeeds or is acquitted or in connection with an application in which he obtains relief from the court.
The court has the power to relieve an officer from liability for negligence, breach of duty or default, where the officer has acted reasonably and honestly, and it appears in the circumstances reasonable that he should be excused.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch. 16 Courtney
Keane on Company Law 5th Ed. (2016) Ch.27 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law