Key Responsibilities of Directors
Whether you are a director of a company which owns an investment property, runs a small or large business, or exists for another reason, you have the same core responsibilities.
The Companies Act 1993 (“the Act”) sets out specific duties which directors must comply with in operating a company and managing the day-to-day business. A company’s constitution and/or shareholders’ agreement may also impose other requirements on how the directors’ operate the company. Therefore, a director’s responsibilities and obligations may vary slightly depending on the company involved.
All directors’ must comply with the duties under the Act, which include:
Primary responsibility for the financial performance of the company and compliance with obligations under the Act rests with the directors. This includes calling meetings of shareholders as and when required, filing obligations with the Companies Office, retention of company records at the company’s registered office and retention of accounting records. It is important to note that the meaning of the term “director” under the Act for these purposes is very wide, and includes any person acting as a director or who is able to instruct a director. Also, directors cannot delegate this responsibility to another director, manager or financial controller.
• Major Transactions:
A “major transaction” is defined in the Act as one involving the purchase or disposition of, or giving of rights over, assets which are more than half the value of the company’s assets. In order to enter into a major transaction, directors must obtain shareholder approval by way of special resolution of 75% of shareholders (or the transaction should be conditional upon obtaining such resolution). However, if the company undertakes a major transaction without this shareholder approval, it cannot rely on this fact to avoid its commitment to third parties.
• Good Faith / Best Interests:
The right of directors to make business judgements is reserved, but when exercising powers or performing duties on behalf of a company, directors must act in good faith and in what they believe is the best interests of the company. Depending on the circumstances, this may also be in the best interests of the shareholders and, in the event of insolvency, in the best interests of creditors. Directors must ensure that the actions or decisions are supportable remembering that they cannot necessarily rely on advice from others without making their own enquiries.
• Compliance with the Constitution:
As mentioned above, in addition to the requirements under the Act, directors must not act or allow the company to act in a manner that contravenes a company’s constitution. This should be checked before any transaction is entered into (for example, the sale of shares, appointment of new directors, calling of meetings).
• Reckless and Insolvent Trading:
Directors must ensure that the business is not being carried on in a way likely to create substantial risk of serious loss to creditors and must not agree to the company incurring an obligation unless they believe, on reasonable grounds, that the company can meet the obligation when required. In exercising business judgement, directors may allow the business to take risks and the fact of temporary insolvency may occur. However, the focus is the decisions made and action or inaction of the directors in light of the relevant information.
• Care Diligence and Skill:
Taking into account factors such as the nature of the company, the nature of the decision and the director’s position and responsibilities, when exercising powers and performing duties, directors must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. In doing so, a director should make proper enquiry where the circumstances indicate a need to do so, and not delegate their decisions or act in reliance on a report, financial statements or advice from a third party where they know that such reliance is not warranted. Directors are required to make their own enquiries.
• Directors and Interests:
Directors may be interested in a transaction where they or a related party are involved directly or indirectly in a transaction and may derive material financial benefit from the transaction. Such an interest must be declared and recorded in the interests register of the company. If it is not, the company may have the option of avoiding the transaction if it did not obtain fair value at the time. However, the company cannot use this provision to avoid a transfer to a genuine third party. Once a director has noted their interest, they will not be precluded from voting on the transaction or participating in it. A prudent director should disclose all interests, even when the interest is tenuous or the potential benefit minor.
The above is a brief summary of key responsibilities of directors under the Act.
We recommend you contact us for specific advice if you require guidance on any of the above duties, so that we may consider your position and advise you based on the specific facts applicable.