Onus issue: the duties of directorship are not to be taken tightly. James Thorby explains why you should think very carefully before accepting a position on the board.
| Author | Thorby, James |
| Position | JOBS & CAREERS |
Let's be clear: a limited-liability company limits the liability of its shareholders, not that of its directors. If you are a director you have potentially unlimited personal liability for your actions. The courts continue to extend the range of directors' duties and the government keeps on introducing new responsibilities. Many directors are also employees. They have further burdens in this role.
On April 6 the Companies (Audit, Investigations and Community Enterprise) Act 2004 extended the protection that a company can give its directors against personal liability. Now is a good time to review the steps that directors, and those considering whether to accept a directorship, should take to protect themselves. The new legislation allows companies to indemnify their directors against the following:
* The costs of defending civil and criminal proceedings brought by a third party as and when such costs are incurred, rather than having to await the outcome. But, if the director ultimately loses, the money must be repaid.
* Certain applications under the Companies Act 1985 where a court finds that a director acted honestly and reasonably but it refuses to exercise its discretion to grant the director relief.
To obtain the benefits of this relaxation, the indemnity in your company's articles should be amended.
Because the scope of the indemnity is limited, you should ensure that the company has adequate directors' and officers' liability insurance. This can cover a wider range of risks than the indemnity and ensure that funds are available if the company is insolvent when you seek to claim under the indemnity. It can also reimburse the company if it needs to pay out under the indemnity.
It is because of the number, variety and seriousness of a director's duties that these protections are so important. As a director you must act within your powers. If you don't, you could be personally liable to indemnify the company for any loss it suffers. This is known as the duty of good faith, it means that you must act in the best interests of the company and not for any other purpose. This sounds straightforward, but in practice it means considering the competing demands of current and future shareholders, employees and creditors. You must use your business judgment to balance these demands.
As an employee you also have a duty of fidelity, which means that you must be faithful to the company and not act against its interests--for example, by setting up a...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.
