All company Directors are bound by legal and fiduciary duties under common law which have legal force. Fiduciary duties are duties which involve trust and the precedence created is that directors ‘are bound to use fair and reasonable diligence in the management of their company’s affairs and ‘to act honestly and implicitly to the benefit of the company’s shareholders, creditors and employees’.
In other words, the directors will act in the best interest of all concerned parties.
These fiduciary duties include:
- Prohibiting loans to directors;
- Restricting other credit to directors;
- Disclosing details of loans and other transactions in which a director has an interest in the accounts.
Because a limited company is a legal entity in its own right and can therefore be sued just like a person, a director (as an officer of the company) is acting as the agent for that company and as such will not incur personal liability.
However there are exceptions and they are as follows:
- If the memorandum states their liabilities to be unlimited;
- If directors exceed the powers conferred on them they can be liable to recompense from the company for any loss incurred;
- If a director gives a personal guarantee;
- If any director entering into a contract in his own name rather than “for and on behalf of”;
- If a director misleads a supplier as to whom the true customer is to be;
- Issuing a cheque, upon which the company name is not clearly stated, and which the bank refuses to honour;
- If found guilty of fraudulent or wrongful trading, the court may instruct a director or shadow director to contribute to the assets;
- A person who has been disqualified from acting as a director under the Directors Disqualification Act, 1986, or another person who knowingly acts under instruction from such a person.
WHO CAN BE A COMPANY DIRECTOR?
Anyone can be a company Director unless they have been disqualified under the Company Director Disqualification Act 1986, where the courts may disqualify persons who are found unfit to act as Directors under various circumstances;
- Conviction of criminal offences in relation to companies;
- Responsibility for wrongful or fraudulent trading in the insolvent liquidation of a company;
- Repeated defaults in filing documents with, or reporting matters to, the Registrar of Companies;
- Being an undischarged bankrupt.
Disqualification can be for periods up to 15 years during which time a person cannot act as a director without leave from the court.
If a person is not listed on the Disqualified Directors Register this can mean one of the following three things:
- The person is not and has not been disqualified.
- The person was disqualified in the past but the disqualification order has since lapsed (a register of lapsed disqualifications is not maintained).
- The person is disqualified but Companies House have not yet received official notification from the courts.
There is no maximum age limit but s157 of the Companies Act 2006 (minimum age for appointment of director) imposes a 16-year old minimum and s159 of the same Act (existing under age-directors) states that directorship ceases where a company has an under-age director on the implementation date (1st October 2008). Also there are no statutory limitations as to nationality or residence so it is possible to merge these into the company Articles but this rarely happens. It is unusual for modern company articles to impose a share qualification but if they do then the shares must be acquired within two months of the Directorship appointment.
Types of Company Director
There are three types of Company DIrector:
1: De Jure Director: This type of Director is formally appointed and registered at Companies House. They owe the fiduciary duties of good faith and loyalty as well as the common law duties to exercise skill and care to the company/shareholders. They also owe statutory duties including those set out in the Companies Act 2006, such as a) the duty to act within their powers, b) the duty to promote the success of the company, and c) the duty to avoid conflicts of interest.
2: De Facto Director: This type of Director is any person occupying the position of a director, (by whatever name called). They will owe fiduciary duties as well as duties imposed by statute because de facto directors come under the general definition of a director in s250 of the Companies Act 2006.
It is however not always clear whether or not someone is a de facto director but in the case of Smithton Ltd v Naggar and others , it was held that one of the key factors in determining whether someone was a de facto director was a) whether that person was part of the corporate governance system of the company and b) whether he assumed the status and function of a director so as to make himself responsible as if he were a director. The judge also gave further guidance on the matter, namely:
- That a job title will not be a deciding factor – the court will also look at what the director actually did;
- It is not a defence to show that the director, in good faith, thought he was not acting as a director. This question will be determined objectively;
- Any acts done by the director should be looked at in the relevant context;
- A relevant factor will be whether the company considered the individual to be a director and held them out as such, and whether third parties considered the individual to be a director;
- The fact that a person is consulted about directorial decisions, or their approval is sought on such decisions, does not in general make them a director because they are not making the decision.
3: Shadow Director: This type of Director is someone upon who’s instructions or directions are acted upon by the Director(s) person and defined in s251 of the Companies Act 2006. Whilst there are some specific requirements in this Act, which state the shadow directors are liable in the same way as de jure directors, (such as regarding wrongful trading, director disqualification and the declaration of interest in existing transactions), whether they owed fiduciary duties was establised in the case of Vivendi SA and anor v Richards and anor . Here the High Court held that a shadow director will typically owe fiduciary duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, the court held that a shadow director will normally owe the duty of good faith (or loyalty) when giving such directions or instructions. The court also stated that a person who gives directions or instructions to a company’s de jure directors in the belief that they will be acted on, can fairly be described as assuming responsibility for the company’s affairs, at least as regards the directions or instructions that person gives.
So, if a person comes within the definition of a shadow director, they should look to act in accordance with the duties imposed on de jure directors, as failure to do so may result in liability.
Failure to prepare and keep records, maintain the company registers or file the accounts can result in the Directors being held liable for penalties, criminal prosecution and possible disqualification, even if they use a company secretary!
THE ROLE OF THE RMC DIRECTOR
Despite being governed by the same laws and legislation that govern commercial companies, RMC Directors are not only usually unpaid volunteers but they also have to be familiar with block management legislation, and the leases, which ideally should be reasonably uniform throughout the block. They should also be familiar with the RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents (3rd Edition) even though the code is not legally binding! This makes breaching it a) not a criminal offence and b) doesn’t create any civial liability. There also does not appear to be any routine routine checks made on agents to ensure they are abiding by the Code so what real use is it? The contents of the code can be used in evidence in court and tribunal proceedings, where freeholders or managers have failed to comply with them but in essence, this code is little more than a ‘best practice’ guideline.
RMC Directors will also be required to abide by the requirements ofthe ICAEW Tech 03/11 Residential Service Charge Accounts as they will be responsible for signing off both the service charge accounts (monies paid by leaseholders and held in trust) and the statutory accounts of the company. This is also a ‘best practice’ guide.
In addition, most RMC’s use the services of a managing agent, due to the logistics of self-managing anything larger than 4 flats or so but even unpaid volunteer Directors must resist the temptation to sit back and let them get on with it. Why? Because they actually employ them! They must therefore be prepared to act as any other commercial employer would, which includes questioning any action taken on their behalf by the agent that they do not understand.
Disqualification, Criminal Prosecution and Penalties
Something else to bear in mind is that RMC’s can be prosecuted under both criminal law and health and safety law such as under the Corporate Manslaughter Act of 2007, and the Health & Safety Offences Act 2008 which raised the maximum fine for offences in the lower courts from £5,000 to £20,000! It also increased the number of offences for which an individual can be imprisoned! It is therefore vitally important for RMC Directors to be aware that it is they who keep overall responsibility for the health and safety of their block, regardless of whether they delegate to others or not.
But how can RMC Directors protect themselves against someone making a claim against them? The answer is that of Directors and Officers Liability Insurance and more on this can be read here in the excellent overview of the subject by Laura Severn, of award-winning Brady Solicitors