Duties of directors & the Companies Act 2014
The Companies Act 2014, which commenced on 1 June 2015, modernises the law relating to companies.
The Companies Act 2014 provides for a new type of private company limited by shares, which has no objects clause and, thus, this new type of company has full and unlimited capacity similar to that of a natural person. In addition, the new Companies Act codifies directors’ duties that were previously based on common law and equitable principles. It provides that a director of a company shall owe the duties, as set out below, to the company and only the company.
The codified duties apply to all types of directors (e.g. non-executive directors, shadow directors) and are as follows:
- A duty to act in good faith in what the director considers to be the company’s interests
This imposes a subjective duty on a director to act in what he or she believes is the best interests of the company.
- A duty to act honestly and responsibly in relation to the conduct of the affairs of the company
A director should act honestly in the best interests of the company. They should never put their own interests ahead of those of the company, nor should they take advantage of opportunities arising from their directorships for personal profit.
A director may be found personally liable under both criminal and civil law, if the company trades in a fraudulent manner while insolvent, with the intention of defrauding creditors. Even when a director’s intentions are bona fide, a director may be guilty of the lessor charge of reckless trading if the company incurs a debt when there are no reasonable grounds for believing that the debt can be repaid, or if the director ought to have known that continuing to trade would give rise to a loss to the company’s creditors.
- A duty to act in accordance with the company’s constitution and exercise their powers only for lawful purposes
A director’s powers are those conferred upon them by the company, usually via the company’s constitution and/or which the board may have delegated to the individual director(s). In addition, where a contract would normally be within the powers of a director, his or her actions can bind the company, even if the director has not been given that specific power. A company may be able to rescind a contract if it is shown that the director was acting outside of his or her powers.
- A duty not to use a company’s property, information or opportunities for his or her own, or others’ use, and a duty to avoid conflicts of interest between the Director’s duty to the company and the Director’s personal interests, unless released of their duty to the company in relation to the matter concerned by a resolution of the members in a general meeting, or by a provision in the company’s constitution
For example, a director who has multiple directorships cannot use any confidential information they receive as a director of one company to benefit another company.
- A duty not to agree to restrict the directors power to exercise an independent judgement unless approved by the members or permitted by the company’s constitution
This duty is not absolute and where a director honestly believes that it is in the best interests of the company for a transaction to occur, that director may fetter his or her duty to exercise independent judgment in order to implement the transaction.
- A duty to exercise care, skill and diligence, having regard to the interests of the members of the company
A director need only exercise the due care, skill and diligence that would be exercised by a reasonable person with the knowledge and experience that is reasonably expected of a person in such a position, and which the director actually has, in the same circumstances. A director is allowed to rely on independent, third-party professional advice and could be found to have acted negligently if they make a decision or implement a transaction that warranted professional advice that was not obtained.
Finally, directors have a duty where they have a personal interest in a contract with the company that is to be considered by the Board of Directors or a committee of directors on which the director sits, to declare the nature of their interest at a meeting of the directors. The Director of Corporate Enforcement can require a company to produce for inspection all such declarations made by its directors.
The Companies Act also includes more general duties for directors which are set out below:
- Duty to have regard to the interests of the company’s employees in general
- Duty to comply with his or her obligations under the Act and to ensure that the requirements of the Act are complied with by the company
- Duty to ensure that the company secretary is suitably qualified
- Duty to prepare a Directors’ Compliance Statement for directors of private companies limited by shares and designated activity companies, with a balance sheet total of more than €12.5 million and annual turnover of greater than €25 million. A compliance statement should confirm that:
- The directors have a compliance policy statement in place in relation to the company’s obligations under the Act and under tax law
- The directors have put in place appropriate arrangements or structures designed to secure material compliance with both company and tax law and
- The directors have conducted a review, during the financial year of those arrangements and structures.
- Duty to disclose certain information (e.g. a shareholding greater than one per cent of the company or related companies), in the Register of Director’s and Secretaries Interests
- Duties regarding transactions between the directors and the company; in particular, there are restrictions on loans, quasi-loans, credit transactions and certain guarantees and security for directors (subject to a summary approval procedure)
- Duty to maintain proper Books of Account and to prepare Annual Accounts
- Duty to have an annual audit performed, if one is required
- Duty to maintain certain registers and other documents; this duty can be delegated to the company secretary
- Duty to file certain documents with the Registrar of Companies; this duty can be delegated to the company secretary
- Duty to convene general meetings of the company; this duty can also be delegated to the company secretary.
Breach of Duties
Breach of a director’s fiduciary duty shall not in itself affect the validity or the enforceability of any contract or other transaction, by any person, other than by the director who acts in breach of his or her duty.
Liability to account and indemnify
When directors act in breach of their duties, they shall be liable to do either or both of the following:
- Account to the company for any gain made directly or indirectly or
- Indemnify the company for any loss or damage resulting from the breach.