Directors of a company are responsible for the day to day management. It is important for any director to properly understand what decisions they are empowered to make - and make sure they do so properly
Directors’ powers come from a combination of
- the company’s Articles of Association;
- relevant company legislation regulating director’s duties, and
- from resolutions made by the company’s shareholders.
The powers given to directors under company’s legislation are to the board of directors as a whole rather than to particular individual directors.
There may also be decisions that can only be made with the members’ approval, for example it may be that a specific transaction cannot be entered into without general members approval or a specific member’s approval. This would usually be detailed in a shareholder’s agreement or in the company’s Articles.
The powers of the directors can be delegated, and often will be where it is more appropriate for either a committee or specific individual directors to take certain day to day decisions. This is for practical reasons. It might be impractical for directors to have to exercise their powers collectively for every decision they need to make. It is not unusual for example for a non-executive director to be employed to oversee one aspect of management, such as the financial management. They would then report to the directors at board meetings on their activities. See our web page – How are company’s decisions made?
For more information on how a company is managed see:
Shareholder involvement
There will be some decisions that may be reserved to shareholders as a body, or particular shareholders. These would usually be set out in a shareholders agreement or bespoke Articles of Association. This will often include a right to veto certain actions, or to vote on them. Certain decisions cannot be taken without the consent of a particular shareholder or shareholders depending on the shareholders agreement. This might for example include the decision to issue new shares or create different classes and rights over shares, or the payment of dividends etc.
Recording decisions
While company legislation allows directors to unilaterally commit a company to most transactions, where each director is responsible for an individual division (for example finance, sales etc.) then there is a need to ensure that all the directors are acting collectively. To fulfil this obligation, directors should hold regular board meetings to consider the business of the company generally, and any resolutions proposed by individual directors. Full records of all decisions made, and the reasoning behind them, should be maintained by the company.
Directors’ duties
Directors have specific duties they are required to comply with under the company legislation when they are making decisions. For more details see our web pages on director’s fiduciary duties.
Some of the general duties directors must keep in mind when decision making when a company is solvent include the duty to:-
- act within the powers set out in the company’s constitution and only exercise the powers for the purposes for which they are conferred;
- promote the success of the company for the benefit of its members as a whole;
- exercise independent judgment;
- exercise reasonable care, skill and diligence;
- avoid a situation which the director may have either a direct or indirect interest that conflicts which the interests of the company;
- the duty not to accept a benefit from a third party given because the director is a director and requesting them to do or not to do something as a director;
- the duty to declare if the director is in any way directly or indirectly interested in a proposed transaction or arrangement with the company.
When a director is a director of a company that is either insolvent or it is more likely than not that the company is going to become insolvent shortly, then the duties change for the directors from those of duties solely to the company, to be predominantly duties to the company’s creditors.
Group companies and common directorships
It is usual that where there are group companies, that some or all of the companies will have common directors. In this case, directors should be careful that they discharge their statutory duties and fiduciary duties to all of the companies that they are directors over, and be careful that they are not conflicted when making decisions. It is particularly important that all decisions and the reasons behind them to be accurately recorded in board minutes.
Practical tips
Directors should be mindful of their duties when making decisions, and maintain some independence and objectivity.
Decisions other than simple management decisions should be put to board meetings. Detailed minutes of these meetings should record the decision making process to defend later attack either by shareholders or by an office holder in an insolvency proceeding. These may also help to mitigate any director disqualification proceedings brought against a director or directors under the Directors Disqualification Act.
At Francis Wilks and Jones our corporate team frequently advise directors and shareholders on how to set up their company to ensure that decisions are taken following company legislation and decisions are correctly recorded. If you are a director or a shareholder and have any concerns, either to ensure that you are following your duties correctly or if you are concerned about decisions being made, then contact our expert team to discuss further.
