Due to the current economic climate,
more businesses face financial difficulties and even insolvency.
Directors need to be fully aware of their duties.
Businesses with exposure to discretionary consumer spending
are likely to suffer more than others. Retailers are in the front
line as consumers tighten their belts. Leisure businesses are
similarly concerned and estate agents and those in the construction
and building industry continue to suffer.
Businesses are managing finances more carefully. While some
optimism may remain, the need for stronger controls and a closer
attention to operations is paramount.
Poor management is as significant a factor as any when looking
at business failure. Better management and a willingness to seek
help could see more businesses survive. Yet, directors often
do not know the extent of their duties.
For the first time, The Companies Act 2006 sets out a statutory
code of directors’ duties. The purpose is to clarify the
law and to try and create “best boardroom practice”.
Seven duties are identified. The first four came into force
in October 2007, and the last three, this month:
- Act within the directors’ powers
- Promote the success of the company for the benefit of its
members as a whole taking into account employees interests,
the impact of operations on the community and the environment,
the desirability of maintaining a reputation for high standards
of business conduct.
This duty takes effect “subject
to any enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors
of the company.” Under
existing common law, when a companys’ solvency is in
question, the directors’ attention must move from the
shareholders towards protecting the creditors’ interests.
- Exercise independent judgement
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interests
- Not to accept benefits from third parties
- Declare to the other directors any interest in a proposed
transaction or arrangement with the company.
Legal consequences of ignorance of directors’ duties can
be harsh. Proceedings can be taken to disqualify directors from
office for between two and fifteen years.
As well as leaving themselves open to disqualification proceedings,
dependent upon conduct, directors in some (albeit rare) circumstances
can be made personally liable for business debts or even face
criminal action. These sanctions may apply simply because directors
are ignorant about their duties.
Non-executive directors owe the same duty of care as their executive
colleagues. All directors are affected, not just those with stakes
in the business.
It is every directors’ duty to understand the business
and its financial position and to take the appropriate action
at all times. Better education would help, but each individual
must ensure they are familiar with what is required. The phrase
ignorance of the law is no defence remains just as true today.
That is incentive enough for directors to seek professional advice.
To find out more about how we can help you, please contact Carvill & Johnson in Northfield, Birmingham. |
