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Company structures - directors' duties

By Warren Bygrave and Claire Barron - 15 Nov 2013

One of the factors discussed in last week's blog was the thought that must be given to what structure is best suited to your new or startup business. Today's blog is about one of the options - operating a company. For a number of reasons, many people choose to run their business through a company. It is easy to set up and relatively simple to administer but it does bring with it some formality and a need to understand the obligations and duties involved.

By way of example you must have at least one director - it is likely that you will take on that role yourself. If so, it is important to be aware of and understand the specific duties imposed on you. Directors' duties include: 

  • to act in good faith and in the best interests of the company
  • to exercise powers for a proper purpose
  • to exercise the care, diligence and skill of a reasonable director
  • to act in good faith and make proper enquiries when using information and advice given by professionals or experts
  • not to trade recklessly
  • not to incur an obligation on behalf of the company that the company is unable to perform
  • not to cause or allow the business of the company to be carried out in a way that creates substantial risk of loss to the company's creditors
  • not to use company property or information for own purposes.

As well as owing duties to the company, a director owes some duties directly to shareholders of the company and, in some circumstances, to liquidators and creditors. 

A breach of directors' duties can entitle a shareholder or a creditor to bring a personal action against a director which may strip away the protection a company might otherwise bring. 

In addition, the Companies and Limited Partnership Amendment Bill is currently making its way through Parliament and will impose criminal liability on directors for a breach of certain duties. Once this Bill is passed, directors will be held criminally liable for breaches of:

  • the duty to act in good faith or to act in the best interests of the company if the director knows that the conduct is seriously detrimental to the interests of the company; and
  • the duty not to become involved in reckless trading if a director knows that the conduct will result in loss to the company's creditors and that loss occurs. 

Duties imposed on company directors are only one of the many issues which need to be understood when running a company. The initial structure is very important to the way in which you conduct your business. Like everything else, doing it properly at the start can save you from problems in the future. 

If you are considering setting up a company or becoming a director of a company, don't be put off, just do it right. We are always happy to discuss business structures and other business related questions you may have.

Contacts

Warren Bygrave

Claire Barron

 

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