Director’s duties in the spotlight – Q&A

Following our recent Director’s duties in the spotlight webinar, there were a wide range of questions put to the speakers. The following provides a general response to those questions which we hope is useful.

Watch the full webinar here.

Q: As a Director on Furlough I am only allowed to undertake statutory duties. It seems to me that there should be a list of activities that I can undertake without falling foul of Furlough rules – but there isn’t… I judged that involvement with signing off the Annual Accounts was ok for Furlough, but surely monthly management accounts should be also, and what about VAT returns, etc, etc.

Victoria Regan, Employment Partner, Rix & Kay
A director will still owe statutory duties under the Companies Act whilst on furlough. A director on furlough will also be able to undertake certain administrative duties, such as preparing and filing accounts, reporting and will retain responsibilities for the actions of the company as an office holder. Government guidance states that if a furloughed director is required to fulfil statutory obligations, over and above that of administrative duties e.g. filing company accounts, they can do so as long as they “do no more than would reasonably be judged necessary for that purpose”. Furloughed directors may not undertake work “to generate commercial revenue or provide services to or on behalf of their company”.

Q: With health and safety now firmly in the minds of employees, what actions should directors be taking to ensure what they have in place, (both general and COVID-19) is effective and how should this be communicated to staff and stakeholders?

Victoria Regan, Employment Partner, Rix & Kay
Directors owe a duty of care to their employees and have a whole host of health and safety obligations to ensure the health, safety and welfare of staff. A Covid-19 secure Risk assessment should be undertaken to assess potential areas of risk in the workplace and if working at home. Staff should be consulted on this and it should be shared with them, to allay any potential concerns that they may have and to reassure them that they are working in a covid secure workplace. This can be shared in internal communications and placed on the company’s website. Many companies are reviewing their current polices, such as flexible working, sickness, flexible working and introducing new Safe Working Policies and Mental Health policies. Mental health and wellbeing of staff should also be considered to see what forms of support could be given to employees, such as Employee Assistance Programmes/helpline/app; having mental health first aiders; signposting and online mental health awareness training and wellbeing webinars. Regular updates on government guidance and providing information on how to access support is also key.

Q: Will COVID-19 see a fundamental change in managing compliance and employee expectation and, if so, what should we be doing now to positively impact this?

Victoria Regan, Employment Partner, Rix & Kay
In view of Government guidance employers are needing to adapt to new ways of working and it is likely that homeworking shall continue to play a pivotal role throughout 2021. Additional risk assessments will need to be undertaken to assess that anyone from home has sufficient and safe workspaces. These assessments can be undertaken jointly with the employee. There may also be data security and confidentiality elements that will also need to be considered. Sharing and consulting with staff on Covid-secure workplaces will also be crucial. Another key consideration will be employee mental health and wellbeing and a separate risk assessment can be undertaken in respect of mental health. Other concerns to bear in mind may relate to an employee’s journey to the workplace, if this involves public transport and this should be discussed with staff to see if any changes could be made to their working hours for instance, so as to avoid travelling in rush hour or availability of car parking facilities. Communication is key and being mindful that all employees will have been affected differently as a result of this pandemic.

Q: Is there a mechanism to remove a Director or Trustee from a Board when there is no mechanism provided for in the company’s Articles?

Kathryn Paisley, Corporate Partner, Rix & Kay
Yes – the Companies Act has a statutory procedure set out whereby the shareholders can remove a director by ordinary resolution (section 168). Be aware of the need for special notice of the meeting and ensure that everything is done by the book – and don’t forget that removing a director from office does not mean that he or she is also validly dismissed as an employee. Definitely worth seeking professional advice before taking action!

Q: How have the courts interpreted these duties, particularly “having regard”?

Kathryn Paisley, Corporate Partner, Rix & Kay
Having regard means that they should pervade and underpin your actions as a director. Whilst we can’t give you chapter and verse on the court’s interpretation of each statutory duty, we can let you know that it is recommended as a matter of best practice that all board minutes reflect that the directors did have regard to the matters set out in section 172 Companies Act when deciding whether a particular course of action was likely to promote the success of the company. Don’t forget that it is the company to whom these duties are owed rather than the stakeholders set out in section 172.

Q: Is a close advisor of a director deemed to be a director?

Kathryn Paisley, Corporate Partner, Rix & Kay
That will come down to circumstance – if the director in question is accustomed to acting in accordance with the instructions of the adviser, then it is possible that the adviser in question is indeed a shadow director. But if the adviser is paid to give advice in certain discrete areas then possibly not – this will definitely come down the facts.

Q: Is there any distinction in duties between Directors of Trusts and Directors of Companies and between Public Sector and Private Sector?

Kathryn Paisley, Corporate Partner, Rix & Kay
Further information is required to be able to give a full answer. However, Trusts are run by trustees rather than directors and they are indeed subject to different rules, save that both trustees and directors are subject to what we stated was a fiduciary duty to act in the best interests of the trust/company – in effect to be loyal. In terms of public sector/ private sector: yes, in some regards – but if the public sector entity has set up a limited company then its directors are subject to the same rules as any private sector directors would be.

Q: I recently resigned as an NED as I was very uncomfortable with the behaviour of the Board. Not following procedure and ‘bending’ the truth. How can I protect myself? I was only on the board for 3 months.

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
There is no quick or indeed easy answer to this as it really is heavily fact specific. It depends on how much a director knows and was involved in such matters. You will hopefully have some form of indemnity for claims by any affected third parties in your service agreement but as for claims by the company against the actions of directors, your limited duration and presumably limited participation maybe key factors if this were to be an issue.

Richard Ludlow, Insolvency Partner, Rix & Kay
In respect of Insolvency issues it will depend on timing – once you have left there is not much that can be done to protect – as long as you had noted, in the relevant board meeting minutes, your position and objection to the decisions being made – then that will offer you as much protection as possible.

Q: How long does one need to have liability insurance after leaving the board?

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
It would be wise to check your service agreement for the indemnities that are given to you that continue after your departure date. Liability under contract and tort is 6 years. In terms of breaches of statutory duty, these end on leaving the Board except for sections 175 (to avoid conflict) and 176 (not to take benefits from third parties). There is no hard deadline given to these two exceptions and it really depends on whether any situation can be linked to specific actions that could be argued are breaches as the link in many cases gets weaker as time passes.

Q: Is there a distinction between a Director on the Employee Ownership Trust and Directors of Companies?

Kathryn Paisley, Corporate Partner, Rix & Kay
There may be a slight confusion between trustees and directors here. If the trust has appointed a director to the company, yes, that director is subject to the same rules as all other directors. If you are talking about trustees of the trust, then they are subject to different rules (but please note again the obligation to comply with fiduciary duties).

Q: Is there a distinction between directors of charities / non-profit organisation?

Kathryn Paisley, Corporate Partner, Rix & Kay
Charities are subject to additional rules but in essence directors’ duties apply to all directors – we would of course be happy to discuss with you your personal circumstances if that could be of assistance. Rix & Kay has a specialist Charity Sector Team and more information about our expertise is here.

Q: How long is the director liability for confidentiality after leaving the board?

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
One should not retain confidential information after leaving their position unless with contractual (i.e. company) agreement as it is company property. The issue then becomes one of the terms agreed in that contract. It is a question that also highlights the knowledge acquired which cannot of course be forgotten. Information that is specific to the company and cannot have been acquired or exploited as generic expertise in any particular industry remains subject to a range of restrictions in fiduciary duties, an ongoing section 175 statutory duty to avoid conflicts and any enforceable contractual covenants post termination.

Q: If you are sole director and sole shareholder, to whom are you liable?

Kathryn Paisley, Corporate Partner, Rix & Kay
To the company every time. The company is a separate legal personality from you as a director and again from you as a shareholder. It is still a requirement that you as a director to record your decisions in writing (albeit as sole director resolutions rather than as board meeting minutes) and well worth (although not a legal requirement) noting in the resolutions your interest as a shareholder director.

Q: I am interested in why software is not used effectively for example to ensure & show (for audit) that corporate governance is executed on. For example, internal controls over financial reporting is one of the statutory requirements in many countries, often requires personal sign-off from the CFO, but is also part of accountability for stakeholder management, ethical behaviour, and achieving business objectives. If implemented, software is usually used for controls over line of business activities (so called first line). It is seldom linked to corporate objectives, seldom used as a strategic value-add tool. In other words, seldom used to reinforce and show good governance. Does it have a more meaningful role here?

Dr Roger Barker, IoD Director of Policy and Corporate Governance
I think that you make a valid point. There is indeed much more scope for software and other digital systems to play a role in governance – in addition to the role that they currently play in business management. Software is playing a growing role in the organisation of board meeting and board pack creation – through various kinds of board portal software, which require specialised development due to the need to ensure security and confidentiality. But software could be more extensively used to provide board members with a more direct link to business and financial data and the monitoring of KPIs on an ongoing basis – not just at board meetings. Part of the obstacle may be a continuing lack of technological expertise in the composition of boards – the usual candidates for board appointments tend to be those from general management or financial backgrounds. However, this is gradually changing – particularly as tech-related issues such as cyber security are emerging as key risks for many kinds of organisation. Let’s hope that this trend continues!

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
This raises a valid point regarding evidence of activity – or otherwise – in corporate governance but the role of strategic and managerial direction of a company may not arguably be largely or entirely framed by directors engaging with any current technological support.

Q: In the current Covid-19 environment is it still possible to successfully serve a Statutory Demand?

Richard Ludlow, Insolvency Partner, Rix & Kay
This is not a straightforward question – the straight answer is that it should be possible, unless the debt is entirely due to Covid reasons, however it will depend on the individual circumstances of the debt and how it was incurred.

Q: Why not de facto disqualification too?

Richard Ludlow, Insolvency Partner, Rix & Kay
Director Disqualification claims can be bought against de facto directors, shadow directors and de jure directors. The issuing of the claims will depend on the level of evidence that exists, following the insolvency of the company, and the view taken by the Insolvency Service/Official Receiver when they carry out their review.

Q: Is there a time limited on the liability of past directors in insolvency. Does the same apply to directors of housing associations?

Richard Ludlow, Insolvency Partner, Rix & Kay
In respect of insolvency for the length of time – in respect of liability for a director – unfortunately it is not possible to be any more specific than to say it will depend on the particular claim that is being looked at by the liquidator or the administrator.

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
With regards to Housing Associations, the term Housing Association is applied widely to a variety of different structures. For example some Associations are in fact registered charities. In addition, it is possible that a Housing Associations structure means that it does not bring the management board within the Companies Act. As such, it is important to be clear on whether any Director roles, within a Housing Association structure, fall within the scope of the Companies Act 2006. Because of this there is no simple response to this question for those entities.

Q: If your personal assets are held in a trust, are these protected from any claims on a director?

Dan Sherlock, Dispute Resolution Partner, Rix & Kay
Either these are assets that are, in all key features, genuinely held in trust and thus managed in a way that puts them beyond all control by the donor director, or the purported trust arrangement cannot work to give any protection. We have been involved in cases where creditors of directors have challenged the validity of a trust and have sought the removal of assets from the trust due to alleged abuse of the scheme. Great care must be taken where trusts are involved.