Click the headings below for more information:
What are a NEDs legal responsibilities?
NEDs have exactly the same status under the law as, and share unlimited liability with, their fellow Executive Directors. These responsibilities and duties are defined in the Companies Act 2006.
DIRECTORS’ DUTIES UNDER THE COMPANIES ACT 2006
The Companies Act has codified the duties of Directors and these statutory duties are applicable to all Directors, both Executive and Non-executive.
There are seven general duties for Directors, set out in Sections 170-177 of the Act, as follows:
1. Duty to Act within their Powers (Section 171)
All Directors are under a duty to act in accordance with the company’s constitution (i.e. its Articles and Memorandum) and observe any restrictions contained therein. In addition, any powers delegated to a Director by shareholders must be used for the benefit of the company.
2. Duty to Promote the Success of the Company (Section 172)
This is one of the most significant changes brought about by the Act in terms of a Director’s duties. It is now the duty of a Director to act in a way that he or she considers, in good faith, would be most likely to promote the success of the company and consequently for the benefit of its members as a whole.
Whilst “success” is not defined in the Act, Directors should consider a number of factors, including the following (non-exhaustive) list:
- The interests of the company’s employees
- The likely long-term consequences of their decisions
- The need to foster the company’s business relationships with suppliers, customers and others
- The impact of the company’s operations on the community and the environment
- The desirability of maintaining a reputation for high standards of business conduct
- The need to act fairly as between members of the company
3. Duty to Exercise Independent Judgment (Section 173)
Although Directors will still be able to consult experts on various matters, the responsibility for decisions taken by them rest with the Directors collectively and they must exercise their own judgment in deciding whether to follow the advice of a third party.
4. Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)
This section identifies the standard of competence which Directors are expected to meet in the course of carrying out their functions. As a minimum, and assessed objectively, Directors must display the knowledge, skill and experience that may be reasonably expected of a person carrying out the functions of the Director in relation to the company. The care, skill and diligence exercised by a Director will also be assessed subjectively in terms of the general knowledge, skill and experience that the Director actually has.
5. Duty to Avoid Conflicts of Interest (Section 175)
A Director must actively avoid situations in which he or she has, or could have, an interest (whether direct or indirect) that conflicts, or may conflict, with the interests of the company. For private companies (formed on or after 1 October 2008), the Act does, however, allow an independent quorum of Directors to authorise such conflicts as long as the company’s constitution does not expressly prevent them from doing so.
6. Duty Not to Accept Benefits from Third Parties (Section 176)
A Director should not make a secret profit as a result of being a Director. The Act states that a Director is not permitted to accept a benefit from a third party by reason of (i) being a Director; or (ii) as a consequence of taking (or otherwise) a particular action as a Director.
7. Duty to Declare Interests in a Proposed or Existing Transaction or Arrangement with the Company (Section 177)
A Director who has an interest in a proposed transaction or arrangement with the company, whether directly or indirectly, must declare the nature and extent of that interest to the other Directors before the transaction or agreement is entered into. It is not a requirement under the Act for a Director to be party to the transaction or agreement to be “interested” in it.
Other duties that a Director should consider, whilst not exhaustive, may include:
- Duty of confidentiality
- Duty to devote sufficient time and attention to the role
- Duty to account to shareholders
- Duty not to make “secret profits”
- A general duty to act in good faith
- Duty to maintain books of accounts
- Duty to file accounts, annual returns and tax returns
- Duty to maintain statutory books
- Duty to ensure that the company is complying with all relevant legislation
LIABILITIES OF NON-EXECUTIVE DIRECTORS
The basis of corporate limited liability is that all debts incurred by a company are the company’s liabilities and not directly the legal liabilities of the shareholders or of the Directors.
Under UK law, a company is a separate legal person from the shareholders and the Directors, including the NEDs. A company normally incurs debts in the course of its business and therefore, as a discrete legal entity, only the company is liable for such debts.
Directors who behave properly and lawfully incur no personal liability as their activities are undertaken as agents for the company. However, there are certain circumstances where personal, unlimited liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading and in the event of illegal acts.
The UK Government offers Advice on running a limited liability company.
In order to benefit from the protection afforded by limited liability company status, NEDs must ensure that they act properly and responsibly. The law requires all Directors to act in this manner.
If a Director (or any other person involved in the management of a company) does not act in a lawful manner, then in certain circumstances a court may examine his or her conduct. It may then order that a personal contribution be made towards the company’s debts, in the event of insolvency, that the Director be disqualified for a period, or, in extreme cases, invoke criminal sanctions (including imprisonment and fines).
Directors in the insurance industry who do not comply with relevant regulations may also face personal sanctions.
Companies may also be fined by the PRA and the FCA for breaking their rules, which may lead to further actions by shareholders, depending upon individual circumstances. At the very least, reputational damage will normally be suffered; often at both the corporate and personal level. Fines and penalties imposed by UK regulators cover a wide range of unacceptable practices; including such matters as failure to meet minimum regulatory standards, proven bribery by intermediaries and mis-selling of insurance products, to name but a few.