Directors’ Duties, Responsibilities and Companies Act Restrictions on Exemptions and Indemnities 5 th October 2016 Dr Thomas B Courtney, FCIS, Partner
Contents of Presentation 1. Directors’ responsibilities and liabilities 2. Directors’ fiduciary duties under section 228 3. Remedies against directors for breach of duties 4. Restrictions on exemptions and liabilities 2 |
Section 1: Directors’ Responsibilities and liabilities 3
Directors’ Responsibilities and Liabilities • Directors’ responsibilities arise under three broad headings which can give rise to : – Criminal sanctions; – Administrative sanctions; and – Civil liabilities • Although main focus of today is on civil liabilities, it is important to note in passing that no indemnity or insurance can prevent a court from sending a director to jail or from restricting or disqualifying a director. 4
Directors’ Responsibilities and Liabilities Directors criminal liabilities arise under: • – The Companies Act 2014; and – Almost every other enactment that creates an offence. Criminal liabilities of directors under the Companies Act 2014 arise • under two broad headings: – Where an act or omission by a director is expressed to be a criminal offence; and – Where an act or omission by a company is expressed to be an offence by the company or by any officer in default . – Section 270 defines “officer in default” as being an officer who “ authorises or who in breach of his duty as such officer, permits the default mentioned in the provision ” – Section 271 creates a presumption that where it is proved that an officer was aware of the basis facts concerning a default, that the officer permitted the default unless s/he can show that s/he took all reasonable steps to prevent it or that by reason of circumstances outside of the officer’s control, was unable to do so. 5
Directors’ Responsibilities and Liabilities Criminal liabilities of directors under other enactments arise • because virtually every enactment that creates an offence will legislate for where that offence is committed by a “body corporate” of which a company registered under the Companies Act 2014 is an example. – Enactments such as the Health & Safety Acts, the Data Protection Acts, the Competition Acts, etc all allow company directors to be prosecuted where certain circumstances are proved – This is despite the fact that the person who commits the primary offence is a company which is a separate legal entity – An example would be: “Where an offence is committed under this Act by an body corporate and the act or omission that constituted the offence is attributable to the consent, connivance or approval of or to be attributable to any neglect on the part of a person being a director, manager, or other similar officer of the body, or a person who purports to act in any such capacity, that person as well as the body shall be guilty of an offence” 6
Directors’ Responsibilities and Liabilities • The Companies Acts provides for categories 1 to 4 offences as well as three “super offences” which involve fines and terms of imprisonment; • Directors can also be made subject to restriction orders and disqualification orders . 7
Section 2: Directors’ Fiduciary Duties under s 228 8
Directors’ duties and obligations • Part 5 of the Companies Act concerns directors’ duties • The stated approach was to codify and consolidate directors’ duties and not re-engineer, add to or increase them • Key provisions in Part 5: – Codification of fiduciary duties – Introduction of a directors’ compliance statement 9 |
Directors’ duties and obligations The codified duties The Act sets out 8 principal fiduciary duties of directors, which • are owed to the company (and the company alone). Breach of duty shall not, of itself, affect the validity or • enforceability of a contract or transaction but this is without prejudice to the liability of a third party who is an accessory to a breach of duty The duties are based on certain common law rules and equitable • principles and are to be interpreted and applied in the same way as the common law rules or equitable principles and regard shall be had to them This has given comfort that the duties are not “new” but rather, • a restatement of existing law 10
The codified duties of directors (a) Act in good faith in what the director considers to be the company’s interests; A subjective duty; allows two directors to hold diametrically opposing views as to what is in the company’s interests. (b) Act honestly and responsibly in the company’s affairs; Similar to the duty to exercise skill, care and diligence. Can be seen as “new” in the sense that it comes not from common law but the statutory test to avoid being restricted where company is insolvent (c) Act in accordance with the constitution and exercise powers only for lawful purposes Important that all directors observe the constitution, but there is an additional dimension for directors of DACs and other companies with objects clauses who have a duty to observe any limitations on their powers (e.g. section 973(3) in the case of DACs) 11 |
The codified duties of directors (d) Not use company property for own or others’ use unless approved by members or in the constitution Reflects the common law position; although a strict literal interpretation could include de minimis usage (e.g. mobile phones, etc), so a clarifying provision might be put in constitution (e) Not to fetter discretion unless permitted by constitution or entered into in the company’s interests Reflects the rule that fiduciaries cannot agree to restrict their power to exercise an independent judgment but that it can be restricted in good faith and in the company’s interests. (f) Avoid conflicts of interest unless released by members (under the constitution or by resolution) Directors are required to avoid situations in which their duty to the company and a director’s other (including personal) interests may conflict 12 |
The codified duties of directors (g) Exercise care, skill and diligence (subjective test) Employs a quasi-objective-subjective standard. Regard must be had to the knowledge and experience that may reasonable be expected of a person in the same position as the director and with the director’s actual knowledge and experience. (h) Have regard to interests of members and employees Regard to employees’ interests is required by section 224; – regard to members’ interests is required by section 228(1)(h) However, the duty to have regard to their interests is owed to – the company and so can only be enforced by the company 13 |
Section 3: Remedies against Directors for Breach of Duties 14
Remedies against Directors for Breach of Duties The CA 2014 not only codified duties, but so too did it codify the common • law and equitable remedies of indemnity and account for breach of duty. Section 232(1) provides where a director acts in breach of s 228(1)(a), (c) • to (g) (note exclusion of (b) and (h)) he or she shall be liable to account to the company for any gain and to indemnity the company for any loss or damage. Directors and persons connected can also be made to account and • indemnity where there is a breach of ss 238 or 239 (substantial property transactions, loans, etc to directors, etc) (s 232(2)) Same applies to payments in the nature of compensation for loss of office, • etc, in ss 251 and 251 (s 232(3)). The foregoing are expressly without prejudice to the company’s right at • common law to claim damages for breach of duty or to seek equitable relief (s 232(5)). A director can be granted relief in respect of a claim for negligence, default • or breach of duty where s/he can convince a court s/he acted honestly and reasonably (s 233) Relief can also be sought where there is an anticipated claim (s 234) • 15 |
Section 4: Restrictions on Exemptions and Indemnities 16
Restrictions on Exemptions and Indemnities Any provision (in a constitution or contract) purporting to exempt or indemnify • an officer from or against any liability which would attach in respect of negligence, default, breach or duty or trust is void (s 235(1)) Provided, a company can indemnity an officer against any liability incurred in • defending proceedings (civil or criminal) in which judgment is given in the officer’s favour OR in connection with any proceedings or application for relief under ss 233 or 234 (see previous slide). The essence of the prohibition is that a company cannot be bound by such a • provision: a company could, voluntarily, agree to pay an officer’s costs where in the company’s interests, or (subject to s 239) make a loan to directors to fund their defence. Officers can also get indemnities from other group companies freed from the • constraints of s 235. And, of course, officers can also benefit from insurance in respect of any • liability for negligence, default, breach of duty or trust (s 235(4)). 17
ICSA: The Governance Institute D&O Insurance Gregory Glynn, Partner and Head of Litigation and Dispute Resolution, Arthur Cox 05/10/2016
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