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Rights and duties of directors

Rights

Can directors delegate some or all of their duties?

Directors can delegate many of their duties but not all of them. This is just as well otherwise directors of large companies would get home very late at night, though of course some wives and husbands say that this is what they do anyway. Subject to the articles, which are very unlikely to provide differently, the directors as a whole can delegate some matters to a committee of directors and the committee can consist of just one director. This of course is a managing director. Directors can also delegate to employees who are not directors. Directors should take care when they delegate as they retain overall responsibility. They should take reasonable steps to see that the employees (and indeed directors) to whom they delegate have the necessary abilities and integrity.

Are there any limits to the number of directorships that I can hold?

There are no limits imposed by statute. There may be a restriction, or indeed a ban, imposed by a service contract but, unless this is the case, you are free to go ahead. Two possible limiting factors should be kept in mind:

You must disclose any possible conflict of interest to the boards of both companies.

You owe a duty of care to all the companies of which you are a director. It may be a breach of this duty if you take on too many directorships. You should not take on more duties than you can reasonably expect to fulfil in a satisfactory way.

Some people do take on a lot of directorships and some are criticised for it. You may have noticed press comment relating to some high-profile directors. The late Mr. Robert Maxwell was a director of more than 200 companies at the time of his sad accident.

As a director am I entitled to access to all the company's statutory records, minute books and accounting records?

Yes.

What right does a director have to call a meeting of the members?

The directors may at any time convene a general meeting of the members and submit resolutions to it for consideration. They must of course give the required periods of notice of the meeting and the resolutions. This power vests in the directors as a whole, not just one or more directors acting independently. The directors must, if it is a requirement in their company, convene annual general meetings within the permitted dates.

As a director I want to take independent advice on my responsibilities. Can I insist that it be paid for by the company?

I can understand that there may be times when you feel the need for this. It could be legal advice, tax advice, advice about a possible insolvency and there are other possibilities. Advice is normally taken by the directors as a whole, but directors can be liable individually and may want advice on their individual responsibilities. It is not unknown for a director to worry that the board is about to disregard his views and do something unwise or improper.

There is not a general right for a director to take independent advice at the company's expense but you could ask your fellow directors. They might agree and in some circumstances they might be grateful later. On the other hand the board may have some suitable procedure already in place. This is recommended by the Combined Code in the following terms:

'The board should ensure that directors, especially non-executive directors, have access to independent professional advice at the company's expense where they judge it necessary to discharge their responsibilities as directors.'

Do directors have the right to be indemnified out of company assets?

It is normal for a director to be indemnified by a company for the consequences of actions taken in the exercise of his duties as a director of the company. This is provided that it is permitted by the articles. It is permitted by Table A and Reg. 118 states:

'Subject to the provisions of the Act but without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the company.'

The position under the new model articles is similar.

It is not possible for a company to indemnify a director for any liability incurred for negligence, breach of trust or breach of duty committed by him against it. An attempt to do so by means of company articles or a service contract will fail.

What does the Act say on the subject of indemnification?

The Act permits (but does not require) the following:

Companies may indemnify directors in respect of proceedings brought by third parties. This covers both legal costs and the financial consequences of an adverse judgment. However, this does not include criminal penalties, penalties imposed by regulatory bodies such as the Financial Services Authority and the legal costs of unsuccessful criminal defences or applications for relief.

Companies may pay directors' costs of defence proceedings as they are incurred, even if the action is brought by the company itself or is a derivative action. The director would still be liable to pay damages and to repay his defence costs to the company if his defence were unsuccessful.

The act prohibits indemnification of a director by an associate company as well as by his own company. "Associated company" means a company in the same group.

Subject to conditions, indemnification by the company in respect of proceedings brought by third parties (such as class actions in the United States) and applications for relief from liability are allowed.

May directors have the benefit of directors' liability insurance?

A company may purchase directors' liability insurance if permitted to do so by its articles. It is very unusual for this to cause a problem. It should be noted that a company may purchase insurance but that it is not required to do so. Directors may wish to check on the point and may negotiate to have it included in their service contracts.

Different policies may cover different risks and of course different limits may apply. It is possible to insure against most civil actions that may be brought against individual directors. However, it is not normally possible to insure against claims for libel and slander, or for claims based on criminal acts and one or two other matters. If a company does not provide directors' liability insurance, a director may choose to take out and pay for such insurance personally.

Directors' liability insurance has become much more common. It may be particularly important for directors of companies with overseas interests, especially in the USA where action against directors is taken more frequently. An action may have disastrous consequences for a director personally, even though the amount involved may be small in relation to the company's assets. It may be particularly important that legal fees are covered.

Insurance cover may be void if the terms are breached or exclusions are ignored and it is not necessarily a license to act recklessly. It should also be remembered that the insurance will lapse if the premiums are not paid. This could be a problem if the company has financial difficulties.

 
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