It is common for public sector entities to acquire a right to appoint a director to the board of a private company. Such right is typically acquired through an investment made in the private company. The investment and right to appoint a director may arise in a fully solvent situation or it may arise in a more distressed situation where the public sector entity is providing some form of rescue funding or other assistance.
When a public sector entity is considering the most appropriate person to appoint as a director it must bear in mind the duties and obligations that attach to the role of director and the personal liabilities that can arise for a director as an individual. Any person requested to act as a director must also be aware of the same.
Directors of a company owe a number of duties to it. The main director duties are set out in sections 171 to 177 of the Companies Act 2006 and can be summarised as follows:
- to act within powers i.e. act in accordance with the company’s constitution and only exercise powers for the purposes which they are conferred;
- to promote the success of the company for the benefit of its members as a whole and to have regard for certain matters when doing so;
- to exercise independent judgement;
- to exercise reasonable skill, care and diligence;
- to avoid conflicts of interest i.e. avoid situations where have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company;
- not to accept benefits from third parties from a third party conferred by reason of the director being a director, or his doing (or not doing) anything as director; and
- to declare if in any way, directly or indirectly, they are interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the other directors.
There are also various other duties and other legal requirements that a director must comply with. The other key director duty we would highlight as part of this article is the duty related to an insolvency situation. This duty is likely to be of particular importance where the public sector has provided some form of rescue assistance to a company and as part of the same has acquired a right to appoint a director.
As noted above, a director is usually under a duty to act in the best interests of the company and its shareholders. However, once a director forms a view that a company is or likely to become insolvent, his duty is to act primarily in the interests of the creditors of the company. Failure to comply with this duty can expose a director to the risk of personal liability for losses sustained by the company’s creditors following any insolvency. This duty applies to all directors of a company regardless of the capacity in which they were appointed.
If a person is or was a director of a company which has gone into insolvent liquidation and, at some point before the commencement of the winding up of the company, that person knew or ought to have known that there was no reasonable prospect that the company would avoid going into such insolvent liquidation and that person was a director at the time then this is known as wrongful trading. Directors must therefore bear this test in mind if there are solvency concerns related to the company. If there are solvency concerns or concerns about wrongful trading directors must keep matters under continual review.
A final point to highlight is the availability of directors and officers’ liability insurance. It would be worth checking whether the relevant company has this in place and if so what the terms are. Such insurance can provide protection in relation to monetary claims made against a company’s directors for alleged wrongful acts.