Duties Of Directors Companies Act 2008 - The Devil Is In The Detail

Published : 8/11/2009

“It is not the strongest species that survive, nor the most intelligent, but the one most responsive to change.” (Charles Darwin)

Sections 76 and 77 of the Act are essentially a codification of the existing case law, however the New Act casts the net wider by defining “knowledge” to include imputed knowledge thus emphasising the onus on the Director to familiarise herself with the business operation.

Sections 76 and 77 introduce a codified regime of Director’s duties. On a reading of the codifications it includes a duty of reasonable care and a fiduciary duty on Directors.  The test in terms of section 76 of the Act so as to ascertain the obligations of care, skill and diligence contain both an objective and subjective element as is evident in the codification of the business judgment rule, a long standing legal principle applied by the courts, in section 76(4).

The business judgment rule states that a Director will have complied with his duty to act in the best interests of the Company and with the necessary care and skill if he/she has:

•    Taken reasonable and diligent steps to become informed about the matter;
•    Had no personal financial interest in the matter or declared the interest if any;
•    And believed alternatively had a rational basis for believing that the decision was in the best interests of the Company.

A Director may discharge her onus by the taking of legal advice and in so doing shift liability to legal advisors if she acted according to the advice.

Section 77(3) of the Act specifies the grounds on which a Director may be held personally liable to the company for any loss or damage flowing from the exercise of her position as Director which include:
1.    Acting on behalf of the company despite knowing that she lacked authority;
2.    Agreeing to a company decision despite knowing that the company was carrying on business recklessly, with gross negligence or the intent to defraud or for fraudulent purposes or under insolvent circumstances,
3.    Being party to an act or omission by the company despite knowing that it was calculated to defraud creditors, employees or shareholders of the company;
4.    Signing or consenting to the publication of materially false financial statements including a prospectus;
5.    Being at a meeting and failing to vote against a decision in contravention of the above.

In light of section 77 all votes of Directors at board meetings should be recorded in writing, especially where there is a dissenting vote.

Section 218 deals directly with personal liability. It states that a person who contravenes the Act will be liable for loss and/or damage suffered as a result thereof. As section 22(1) prohibits reckless and insolvent trading, Directors contravening section 22 will be held personally liable under Section 218 of the New Act. Whilst personal liability is not a new development  the extent and basis for such liability has been developed. Furthermore the New Act has done away with Director indemnification – seeking to hit where it hurts the most – the Director’s personal pocket!

In order to stay ahead of the game one must be familiar with the rules that apply. In the shifting landscape of business Directors must consider their role, actions, omissions and duties very carefully and where necessary take legal advice.

Written by:     

Peter Andrew
Associate
Strauss Daly Inc.