COVID-19 Update: A Timely Reminder of the Duties Directors Owe to Their Companies
05 June 2020
The directors of a company are charged with its management and with responsibility for its assets by its members. Accordingly, directors required to fulfil certain duties in carrying out this management. These duties are owed primarily to the company.
In the fulfillment of those duties, directors must have regard to the interests of a company’s shareholders, its employees and, in certain circumstances, its creditors. The last of these requirements – to have regard to a company’s creditors – may become more and more pressing for companies that encounter difficulties as the governmental restrictions imposed in response to the COVID-19 pandemic are eased.
While some directors’ duties are found in other places, most notably the common law, the Companies Act 2014 codifies the principal duties owed by directors to their companies.
The eight codified fiduciary duties, which are not intended to be exhaustive, are:
To act in good faith in what the director considers to be the best interests of the company
To act honestly and reasonably in relation to the conduct of the affairs of the company
To act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law
To not use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless this is expressly permitted by the constitution or approved by the resolution of the members in general meeting
To not agree to restrict the director’s power to exercise an independent judgment unless expressly permitted by the company’s constitution or the director believes in good faith that it is in the interests of the company to fetter his or her discretion
To avoid any conflict between the director’s duties to the company and his/her other, including personal, interests unless the director is released from this duty in accordance with the constitution or by a resolution of the members
To exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director and the knowledge and experiences which the director has, and
To have regard to the interests of its members
In addition, the Act imposes duties on directors to declare any interests that they may have in contracts with their companies and to ensure that their companies comply with their obligations under the Act.
Directors are expected to fulfil their duties by taking collective decisions. The chief forum for doing this is at properly convened and held board meetings. Board meetings allow directors to make the deliberations and take the decisions that enable them to fulfil their duties to their companies.
As a general rule, directors do not have to meet physically to conduct their businesses. Save where a company’s constitution provides otherwise, its directors can meet via telephonic or other means.
Where a meeting is held remotely and unless a company’s constitution provides otherwise, the meeting is deemed to have taken place either at the location of the majority of participating directors or, if there is no majority in one place, at the location of the chairman. If there is no majority in one place and no chairman has been appointed, the meeting is deemed to take place at such location as the meeting itself may decide.
This entitlement has been and will continue to be vital to boards of directors as they meet during the period of lockdown imposed as a response to the Covid-19 pandemic although companies should take appropriate tax advice to ensure that they are seen to be controlled and managed in Ireland.
It is important that basic minutes of the proceedings of board minutes are kept. Minutes should always record the decisions made at the meetings, but do not have to record deliberations.
Interests of creditors
Where it appears to the directors of a company that the company cannot, or it is likely that the company cannot pay its debts as they fall due, the directors must effectively run the company for the benefit of the company’s creditors, in order to avoid personal liability on their part for fraudulent or reckless trading. This has been dealt with in greater detail here.
Directors’ liabilities for breach of duty
Should a director be found to be in breach of a statutory duty owed to his or her company, the director may be required to indemnify the company for any loss arising from the breach or to account to the company for any profit which the director may have made thorugh his or her breach.
In addition, a director may be found to be criminally liable if his or her company commits an offence under the Act and the director is an officer “in default”. A director will be an officer in default if he or she authorises the default or, in breach of his or her duty to their company, permits the default which has led to the company committing the offence.
The Act presumes that a director of a company has permitted the default in question unless he or she can prove otherwise.
The Act contains a general defence for a director to prove that, due to circumstances beyond his or her control, he or she was unable to take all reasonable steps to prevent the default.
Directors should consider the legal duties they owe to their companies, especially as they grapple with challenges which may arise as the governmental restrictions imposed in response to the COVID-19 pandemic are eased.
Directors remain the trustees or minders of their companies’ assets and their legal duties reflect this position of responsibility. While directors can delegate tasks to other persons, they cannot delegate their responsibilities.
Should you require further advice in this area, please contact a member of our Corporate Governance & Compliance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.