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Directors’ duties and service contracts

At Libra Solicitors we understand that the role of a director can carry with it a great deal of responsibility. We can provide businesses with advice in respect of the duties directors have to undertake and guidance as to how they can meet the statutory obligations of the business whilst simultaneously promoting the organisation’s success.

We can also ensure that the businesses interests are properly protected by drafting effective directors’ service contracts that meet the needs of the organisation and comply with the regulations with which the business must comply. At Libra Solicitors, we believe that properly drafted contracts whose provisions are regularly reviewed, will promote stability within the business and avoid costly internal disputes. For a confidential discussion about your business needs, call us today on 01223 632420 and arrange an appointment.

Directors’ duties

The role of a director carries significant responsibility as directors generally make the tactical and operational decisions that will determine the success of the business.

It is also the directors of a company who are individually and collectively accountable for ensuring that the company meets its statutory obligations. Failing to meet these statutory requirements can lead to the company being fined and individual directors facing prosecution, particularly in respect of health and safety breaches and the misfiling of annual reports and accounts.

There are seven statutory duties that a director owes to the company and they can be found in the Companies Act 2006 and below. However, there are other duties and responsibilities, such as the duty of confidentiality that might be placed on a director by the company itself, or through legislation.

Directors should be aware that breaching their duties could result in the company, or in some circumstances the shareholders, taking action. Remedies will depend on the breach, but will generally be awarded in the form injunctions, damages or compensation. However, regulatory bodies could, depending on the breach of duty, seek a criminal prosecution.

If you are a director who is being investigated, or litigated against because of an alleged breach of duty, or a business worried about meeting its statutory obligations, we will give you clear, practical advice that you can trust.

At Libra Solicitors we believe that it is never too early to take legal advice, but sometimes, it can be too late. For a confidential conversation about directors duties and the consequences of breaching, call us on 01223 632420 and arrange an appointment. We look forward to hearing from you.

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Executive directors and service agreements

Executive directors are employees as well as directors and their employment contracts are called service contracts, or service agreements.

At Libra Solicitors we believe that a properly drafted service contract or agreement could help avoid costly disputes in the future between the business and the executive director. In drafting the service contract, we suggest that regard should be given to other company documentation and the provisions of the service contract should be recorded in the both the articles and the shareholders agreement.

The service agreement should clarify the duties, authority, specific responsibilities and rights of the executive director and will generally include the 7 statutory duties imposed through legislation. Other duties, such as a duty of confidentiality might also be included. In addition, provisions identifying the action that would be taken should a breach occur should also be included.

The agreement should also include provisions that identify the procedures to be followed in the event of a dispute between the company and the executive director.

At Libra Solicitors we appreciate that your business has its own specific needs and we can help you meet them. Whether we are drafting a bespoke service agreement tailored to the individual requirements of your business and the executive directors themselves, or are reviewing the existing agreements to check whether they are ‘fit for purpose’, our focus is helping your business achieve its objectives.

In addition, should a dispute occur, we understand that both the director and the business may wish to continue their relationship so we can also advise individuals and businesses on the various ADR options that may be available to them and provide guidance and representation throughout the process.

For a confidential discussion about your business needs, call us today on 01223 632420 and arrange an appointment.

Director duties under the Companies Act

The Companies Act 2006 identifies seven general duties a director owes to the company.

1) Section 171 provides for the duty to act within powers

A director must act in accordance with the company’s constitution and exercise the powers conferred on him or her only for the reason that they were granted.

2) There also exists a duty to promote the success of the company

Section 172 states that

‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

  1. the likely consequences of any decision in the long term,
  2. the interests of the company’s employees,
  3. the need to foster the company’s business relationships with suppliers, customers and others,
  4. the impact of the company’s operations on the community and the environment,
  5. the desirability of the company maintaining a reputation for high standards of business conduct, and
  6. the need to act fairly as between members of the company.’

3) In addition, there is a duty under Section 173 of the Act to exercise independent judgement

Directors are allowed to take relevant advice, legal or otherwise and at Libra Solicitors, we believe they should consider doing so when the need precipitates it. However, directors are obliged to exercise their individual judgement in deciding how to act.

4) A duty to exercise reasonable care, skill and diligence exists under Section 174 of the Act

In respect of this duty what is determined as ‘reasonable’ in one set of circumstances may not be necessarily be considered ‘reasonable’ in another set of circumstances. In addition the Act stipulates that the knowledge, expertise and experience of the director should also be considered in determining whether or not the director exercised ‘reasonable care skill and diligence’ when acting or failing to act.

5) A director has under Section 175 of the Act, a duty to avoid conflicts of interest between himself or herself and the company

Although this duty would seem self-explanatory, conflicts of interest can arise in a number of different ways and Section 175 (2) of the Act emphasizes areas of particular concern

Section 175 (2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

However, provided that the right formal process is followed, the company can gives its permission so that this duty will not apply.

6) The duty not to accept benefits from third parties is set out in Section 176 of the Act.

Section 176 (1) A director of a company must not accept a benefit from a third party conferred by reason of—

  1. his being a director, or
  2. his doing (or not doing) anything as director.

However, the company can give its consent to the director accepting the benefit provided that the company’s constitution allows it.

7) Under Section 177 of the Act a duty to declare interest in a proposed transaction or arrangement also exists.

The legislation is applicable to both indirect and direct interests and it is necessary to make the declaration before entering into the transaction.

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