Statutory Duties of Directors I
The statutory duties of directors are set out in the Companies Act, 2014. This statement of their obligations is without prejudice to any legislation, including the Companies Act. The statutory duties may be enforced in the same way as any other fiduciary duty owed to a company by its directors.
The statutory duties are specifically stated to be based on common law and equitable principles as they apply in relation to the directors of companies and shall have effect in place of those rules and principles, as regards the duties owed to a company by a director.
They are to be interpreted and applied in the same way as common law rules or equitable principles. Regard shall be had to the corresponding common law rules and equitable principles in interpreting those duties and applying those provisions
Statutory Duties of Directors II
The statutory duty of directors are as follows:
- act in good faith in what the director considers to be the interests of the company;
- act honestly and responsibly in relation to the conduct of the affairs of the company;
- act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law;
- not use the company’s property, information or opportunities for his or her own or anyone else’s benefit, unless this is expressly permitted by the company’s constitution, or the use has been approved by a resolution of the company in general meeting;
- not agree to restrict the director’s power to exercise an independent judgment unless this is expressly permitted by the company’s constitution or the director agreeing to such has been approved by a resolution of the company in general meeting;
- avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests, unless the director is released from his or her duty to the company in relation to the matter concerned, whether in accordance with provisions of the company’s constitution in that behalf or by a resolution of it in general meeting;
- exercise the care, skill, and diligence which would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director; and the knowledge and experience which the director has;
- to have regard to the interests of its employees; and
- to have regard to the interests of its members.
Without prejudice to the board’s duties, the directors are to act in good faith in what the director considers to be the interest of the company.
General Fiduciary Duties I
The statutory duties embody the pre-existing fiduciary duties of directors developed in equity. They restate the long established principle that the directors’ powers must be exercised in good faith for the benefit of the company and for the purposes for which they were granted. They may not be used to achieve a purpose for which they were not contemplated, such as the furtherance of the director’s personal agenda.
Directors must act honestly and responsibly in the conduct of the affairs of the company. They must act in good faith in what they consider to be the interests of the company.
There may be significant elements of subjectivity in the application of these duties. It is recognised that there may be honest differences of opinions in relation to what is in the best interest of the company in the particular circumstances.
General Fiduciary Duties II
Directors must act in accordance with the constitution of the company and exercise their powers only for the purposes allowed. This duty reflects the obligation to comply with the company’s memorandum and articles of association. Private limited companies do not now have objects clauses so that in this respect, the duty applies primarily to other types of company, such as designated activity companies.
The directors must have regard to the interests of the shareholders. This is part of the duty to act in the best interests of the company as a whole. It is owed to the company, as representative of the shareholders collectively.
The directors must have regard to the interest of the employees. This duty is owed to the company only and is not enforceable by the employees.
Directors must not misuse the company’s property, information, and opportunities. This reflects equitable fiduciary duties in respect of a protected party’s property. Generally, a person may not gain from holding a fiduciary position or divert corporate opportunities for his personal benefit or for the benefit of connected persons.
Directors may be allowed to use company property in the ordinary course of their duties. They may be paid by the company. They may obtain and be granted indemnities by the company. They may enter certain transactions with company provided that they obtain the requisite shareholder approvals.
The extent to which directors may receive benefits from the company depends on the terms of the benefit, the company’s constitution and approval by resolution of the members. Some types of transactions are allowed, subject to following specified procedures.
Some types of transactions are prohibited. Some breaches of duty may be released by ordinary or special resolution. Other releases are not permitted by an ordinary or special resolution as they would constitute fraud on the minority or oppression.
Fettering Discretion I
Directors must not agree to restrict their powers to exercise independent judgment unless it
- is expressly permitted by the company’s constitution;
- is allowed under the nominee director’s provision; or
- has been approved by resolution of the company in general meeting.
The duty limits the extent to which a director (as opposed to the company) may contract with a third party to carry out the business of the company in a particular manner.
The statutory duty reflects the equitable principle that a fiduciary may not fetter his discretion as to the free and independent exercise of his powers. They must exercise from time to time, their independent judgment as to what constitutes the best interests of the company.
Reflecting equitable principles, the company may release directors from the duty by means of an independent and informed resolution passed by shareholders.
Fettering Discretion II
If a director of a company considers in good faith that it is in the interests of the company for a transaction or engagement to be entered into and carried into effect, a director may restrict the director’s power to exercise an independent judgment in the future by agreeing to act in a particular way to achieve this.
Without prejudice to the director’s duty to act in good faith in what the director considers to be the interests of the company, a director of a company may have regard to the interests of a particular member of the company where the director has been appointed or nominated for appointment by that member, being a member who has an entitlement to so appoint or nominate under the company’s constitution or a shareholders’ agreement.
Statutory Duty of Care
Directors must exercise the same care, skill, and diligence, which would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director, with the knowledge and experience which the director has.
This statutory duty reflects the general common law duty of care owed by directors to their company. The duty is objective but takes account of the particular experience and skills of the director.
The director must meet the basic duty of care of are a reasonable man in the circumstances. If, however, he has special expertise, he will be expected to meet the higher standard of a person who professes that expertise. He is to exercise the standard of care that a reasonable person with that person’s knowledge and experience would exercise in the circumstances.
Consequences of Breach
The breach by a director of one of the statutory duties does not of itself affect the validity or enforceability of any contract or transaction with a third party. The outsider may not rely on a breach of duty to avoid a contract with the company.
Equally, the company cannot avoid the contract with the outsider on the basis that the directors are in breach of duty. In accordance with the existing principles, these are internal governance matters of the company with which third parties need not concern themselves.
The breach of duty may be invoked in order to avoid a contract or transaction, where the third party and the director collude to receive to commit a breach of duty and knowingly receive a benefit from it. The above principle does not affect the principles of liability of a third-party, where he or she has been an accessory to a breach of duty or has knowingly received a benefit from it.
Where there has been a breach of statutory duty, the director is liable to the company for breach of the duty, notwithstanding the validity of the transaction.
Account and Indemnity I
There is a statutory right of indemnity and account where a director acts in breach of the statutory fiduciary duties. He is to be liable either to account to the company for the gain which he makes directly or indirectly from the breach or to indemnify the company for any loss or damage resulting from the breach. He may be liable to do both. The corresponding common law rule or equitable principle with respect to the matter are to apply.
Where the company enters a non-cash consideration transaction, loan, credit transaction or guarantee for the benefit of a director, a director of its holding company or a person connected with them, the director or the persons so connected and any other director who authorised the transaction or arrangement is liable
- to account to the company for any gain which he has made directly or indirectly from the transaction or arrangement;
- to indemnify the company for any loss and damage resulting from the transaction or arrangement; or
- do both, if the circumstances so require.
Account and Indemnity II
The obligation to account applies, irrespective of whether the transaction could have been avoided by the company. It applies without prejudice to the company’s right to damages for breach of duty and any right to equitable relief in respect of the matter concerned.
This special statutory right is not to have the combined effect of enabling the company to be afforded more compensation for damage or injury or more protection of any proprietary right than is just and equitable in the circumstances.
A similar liability arises where a director receives a payment contrary to the provisions in respect of compensation for loss of office.
Relief from Liability
Where a transaction or arrangement is entered by a company with a director or a person connected with him, or with its holding company, in contravention of the above duties/ provisions, that director shall not be liable, if he proves that he took all reasonable steps to secure the company’s compliance with the statutory obligations.
He is not liable if he or she shows that, at the time the transaction or arrangement was entered into (or, as the case may be, at the time the particular transaction was entered into in pursuance of the arrangement), he did not know the relevant circumstances constituting the contravention.
In any proceedings for negligence, default, breach of duty or breach of trust, the court may grant relief to the officer concerned, if it appears that the officer concerned has acted honestly and reasonably and that, having regard to all the circumstances of the case (including those connected with his or her appointment), he or she ought fairly to be excused for the wrong concerned. The power may be used to relieve the officer concerned, either wholly or partly, from his or her liability in respect of the wrong concerned on such terms as the court may think fit.
If an officer of a company has reason to apprehend that any claim will or might be made against him or her in respect of any negligence, default, breach of duty or breach of trust, he may make an application to be relieved of liability in respect of the wrong concerned. On such application, the court has the above powers to relieve the applicant.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch16 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