A reminder and update for directors

This briefing serves as a memoir on the duties imposed on directors under the Companies Act 2006, now in full force, and new increased penalties for late filing of company accounts at Companies House. In addition it will provide an introduction to the draft Bribery Bill which was published on 25 March 2009.

Director’s duties
Prior to the enactment of the Companies Act 2006 (the “Act”), the duties of a director were governed by statute and case law. The Act has codified these duties in a non-exhaustive list of ‘general duties’ which effectively incorporate those duties previously governed by case law.

The ‘general duties’ are summarised as follows:

· Duty to act within powers – a director must act in accordance with the company’s constitution and must only exercise powers for the purpose for which they are conferred – before making a decision check that the company’s memorandum and articles of association expressly give permission to do an act.

· Duty to promote the success of the company – please see below for a full analysis.

· Duty to exercise independent judgement – essentially a director can still rely on the judgement of others providing they exercise their own judgement in determining whether to accept that judgement or not.

· Duty to exercise reasonable care, skill and diligence – this duty is determined by a double standard; i) having regard to the reasonable care, skill and diligence expected of a director carrying out the said task and ii) having regard to the general knowledge, skill and experience the director has – this prevents a director from arguing that they did not have the requisite knowledge to make an informed decision.

· Duty to avoid conflicts of interest – a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests – the simplest way to avoid such a conflict is to declare any potential conflict at a board meeting of the directors.

· Duty not to accept benefits from third parties – conferred by reason of being a director or performing (or failing to perform) anything as a director – if a director is keeping a benefit (whether financial or not) secret from others, this could fall within the scope of a breach of the duty.

· Duty to declare interest in proposed transaction or arrangement with the company – the nature and extent of the direct or indirect interest must be declared prior to entering into the transaction or arrangement – the Act helpfully tells a director how not to breach a duty – declare the interest.

Particular attention is given to:
The duty to promote the success of the company (for the benefit of its members)

This replaces the duty developed by case law to act in good faith in the interest of the company.

In exercising this duty a director should have regard to (amongst other things):-

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

This duty has broadened the considerations a director should be mindful of in promoting the success of the company to include environmental and community considerations.

The Act does not provide guidance on which considerations carry more weight and what the position is when a conflict arises. Thus, it would be a matter for the directors to exercise their discretion in good faith.

From a practical point, directors may feel that it is necessary in their board minutes to minute consideration of all the above factors to show that this duty has been adhered to. Although this is a sensible approach, it can prove time consuming, therefore recent practice has prescribed that the board minutes could contain a generic statement to show that the factors have been considered.

Company and Limited Liability Partnership (“LLP”) Filing Requirements
From 1 February 2009, companies are subject to increased automatic penalties if their accounts are delivered late to Companies House.

The penalty varies from £150.00 to £7,500.00 depending on the type of company and how late the accounts are filed. Failure to deliver accounts on time is a criminal offence and the directors (or designated members of an LLP) serving at the time of the missed deadline can be PERSONALLY liable to a fine of up to £5,000 plus £500 per day until the accounts are filed.

The Bribery Bill
The purpose of the Bill is to “reform the criminal law of bribery to provide for a new consolidated scheme of bribery offences to cover bribery both in this country and abroad”.

This draft Bill creates a corporate offence of negligently failing to prevent bribery in connection with a company’s business that can only be committed by a corporate body. If an individual, such as a Compliance Officer, is not allocated to be responsible for preventing bribery then responsibility is deemed to be that of any senior officer, which includes a director. The rationale here is to improve a company’s corporate governance and accordingly a defence is allowed where the Compliance Offer is not a senior officer and the company can show it had adequate systems in place to prevent bribery. If, however, a defence is not accepted, the court will have the power to impose an unlimited fine on indictment.

Directors should be aware that it will be a criminal offence where they offer or accept or agree to offer or agree to accept a bribe. For this offence the maximum penalty is ten years’ imprisonment and/or an unlimited fine.

Although this draft Bill is not yet law, it is important that companies and directors are aware of the proposed changes to the law in a pro-active way rather than being reactive.

Further Information
For further information or to discuss any concerns with respect to your company or LLP, please contact Natalie Wood on 01737 854544 or at natalie.wood@morrlaw.com.