Directors Duties
Directors - Do you know your Duties & Responsibilities???
The law relating to directors' responsibilities and liabilities has developed very considerably in recent times. The general principles were originally established by the courts as part of the common law and, for the most part, these principles still hold good. More recently, however, they have been supplemented by the more specific rules laid down in our Companies Acts (in particular, in the Companies Act, 1990). The purpose of this article is to provide a brief summary of the relevant general principles and to note the more important statutory obligations imposed on directors of an Irish private company
The main purpose of the directors is to manage the affairs of the company. A company must have two directors with at least one director an Irish resident. Where this is not possible, the company must hold a bond in a prescribed form. A person may not be a director of more than 25 companies at any one time. The appointment of directors is normally provided for in the company's articles of association. Certain persons are ineligible to act as company directors, for example auditors of the company, undischarged bankrupts and persons disqualified by the Court to act as a director.
There is often confusion over the difference between an executive director and a non-executive director and their duties to the company. An executive director is an employee of the company and a non-executive director is not an employee of the company. The law makes no distinction between the duties of an executive and non-executive director so it is very important for a non-executive director to have reasonable knowledge of the company's business.
Duties Under General Law
1. Skill, care and diligence
Directors owe their company a duty to show skill, care and diligence in the discharge of their functions and will be liable to the company for loss suffered by it as a result of a breach of this duty. Firstly, a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. Secondly, while a director must exhibit a reasonable standard of care in making decisions, he will not be personally liable for loss caused by mere errors of judgement. Thirdly, a director can rely on persons entrusted by the directors with carrying on executive and/or management functions to do so in the absence of grounds for suspicion as to dishonesty or incompetence.
2. Fiduciary duty.
Directors owe duties to their companies which are similar to those owed by trustees to their beneficiaries. This means that directors stand in a fiduciary relationship to their company. A director may be held liable for any breach of a fiduciary duty. The principal fiduciary duties of directors include the following:-
Duties under Company Law
The Companies Acts contain numerous provisions which impose fines on directors for failure to comply with the requirements of the legislation. Some of the important provisions include:
1. Fraudulent Trading
A director will be responsible for fraudulent trading if he was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. In this case, the director can be held personally liable for the bad debts of the company. Any director found guilty of the offence will be liable on summary conviction to €1,269.74 (previously IR£1,000) or 12 months imprisonment or both and on indictment to a fine of up to €63,486.90 (previously IR£50,000) or up to 7 years imprisonment or both.
2. Reckless Trading
A director will be guilty of reckless trading if he was knowingly a party to the carrying on of any business of the company in a reckless manner. A director will be deemed to be a party to reckless trading if (a) having regard to the general knowledge, skill and experience that might reasonably be expected of a person in his position, he ought reasonably to have known that his actions would cause loss to the creditors of the company, or (b) he was a party to the company incurring debts without honestly believing the company could meet them.
3. Proper Accounts
A director can also be liable for some or all of the debts of a company which is in liquidation, if it is unable to pay its debts and has not kept proper books of account.
Conclusion
On the application to Court of the Director of Corporate Enforcement, a liquidator or receiver, a restriction order may be made against any director which will restrict him from acting as a director for a period of 5 years. An application may also be made to have the director disqualified from acting as a director. The Court also has a discretion to fine the individual directors as it sees fit.
With more and more companies going to the wall in the recession it is likely that we'll see more applications made to Court to have directors restricted or disqualified. The above is a brief summary of director's duties and responsibilities and the standard of care required from directors will often depend on the particular circumstances of the case.
If you require any further information please contact Stephen Cooney, Solicitor, Patrick Tallan & Company, New Town Centre, Ashbourne, Co. Meath - 01 8352027
The law relating to directors' responsibilities and liabilities has developed very considerably in recent times. The general principles were originally established by the courts as part of the common law and, for the most part, these principles still hold good. More recently, however, they have been supplemented by the more specific rules laid down in our Companies Acts (in particular, in the Companies Act, 1990). The purpose of this article is to provide a brief summary of the relevant general principles and to note the more important statutory obligations imposed on directors of an Irish private company
The main purpose of the directors is to manage the affairs of the company. A company must have two directors with at least one director an Irish resident. Where this is not possible, the company must hold a bond in a prescribed form. A person may not be a director of more than 25 companies at any one time. The appointment of directors is normally provided for in the company's articles of association. Certain persons are ineligible to act as company directors, for example auditors of the company, undischarged bankrupts and persons disqualified by the Court to act as a director.
There is often confusion over the difference between an executive director and a non-executive director and their duties to the company. An executive director is an employee of the company and a non-executive director is not an employee of the company. The law makes no distinction between the duties of an executive and non-executive director so it is very important for a non-executive director to have reasonable knowledge of the company's business.
Duties Under General Law
1. Skill, care and diligence
Directors owe their company a duty to show skill, care and diligence in the discharge of their functions and will be liable to the company for loss suffered by it as a result of a breach of this duty. Firstly, a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. Secondly, while a director must exhibit a reasonable standard of care in making decisions, he will not be personally liable for loss caused by mere errors of judgement. Thirdly, a director can rely on persons entrusted by the directors with carrying on executive and/or management functions to do so in the absence of grounds for suspicion as to dishonesty or incompetence.
2. Fiduciary duty.
Directors owe duties to their companies which are similar to those owed by trustees to their beneficiaries. This means that directors stand in a fiduciary relationship to their company. A director may be held liable for any breach of a fiduciary duty. The principal fiduciary duties of directors include the following:-
- To act in what he believes to be the best interests of the company;
- To exercise his powers only for proper purposes;
- Not to make a personal profit from a conflict of interest;
- Not to compete with the company by using the property of the company
Duties under Company Law
The Companies Acts contain numerous provisions which impose fines on directors for failure to comply with the requirements of the legislation. Some of the important provisions include:
1. Fraudulent Trading
A director will be responsible for fraudulent trading if he was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. In this case, the director can be held personally liable for the bad debts of the company. Any director found guilty of the offence will be liable on summary conviction to €1,269.74 (previously IR£1,000) or 12 months imprisonment or both and on indictment to a fine of up to €63,486.90 (previously IR£50,000) or up to 7 years imprisonment or both.
2. Reckless Trading
A director will be guilty of reckless trading if he was knowingly a party to the carrying on of any business of the company in a reckless manner. A director will be deemed to be a party to reckless trading if (a) having regard to the general knowledge, skill and experience that might reasonably be expected of a person in his position, he ought reasonably to have known that his actions would cause loss to the creditors of the company, or (b) he was a party to the company incurring debts without honestly believing the company could meet them.
3. Proper Accounts
A director can also be liable for some or all of the debts of a company which is in liquidation, if it is unable to pay its debts and has not kept proper books of account.
Conclusion
On the application to Court of the Director of Corporate Enforcement, a liquidator or receiver, a restriction order may be made against any director which will restrict him from acting as a director for a period of 5 years. An application may also be made to have the director disqualified from acting as a director. The Court also has a discretion to fine the individual directors as it sees fit.
With more and more companies going to the wall in the recession it is likely that we'll see more applications made to Court to have directors restricted or disqualified. The above is a brief summary of director's duties and responsibilities and the standard of care required from directors will often depend on the particular circumstances of the case.
If you require any further information please contact Stephen Cooney, Solicitor, Patrick Tallan & Company, New Town Centre, Ashbourne, Co. Meath - 01 8352027