Director Duties and Risk Mitigation Strategies
By Jeremy Parsons
Being a company director comes with a number of important responsibilities. There are clear directors’ duties set out in the Companies Act as well as other best practice guidelines to follow. In addition, it is important to consider how best to protect your assets in the event that your position as a director leads to personal liability.
The Companies Act sets out the obligations of company directors, which includes the following:
- To act in good faith and in the best interests of the company;
- To exercise powers for a proper purpose;
- Not trade in a reckless manner or a manner that is likely to create a substantial risk of loss to the company’s creditors;
- Not agree for the company to incur an obligation unless the director believes that the company will be able to perform the obligation;
- To perform directorship duties with care and diligence;
- To ensure that the company is solvent, meaning that it can pay its debts as they fall due and that it has more assets than liabilities;
- To ensure that the company meets its filing obligations with the Companies Office and to keep and maintain all company records as required by the Companies Act;
- To exercise due diligence to ensure that the company complies with its health and safety obligations. This requires directors to take reasonable steps to understand the business’s health and safety risks and to ensure that they are managed so that the company meets its legal obligations.
In addition to the statutory obligations, the Institute of Directors publishes a code of practice for directors. This code details a number of other principles for directors when observing best practice. These include:
There are many others and the code includes details of what each principle means. Those interested in learning more about the principles of directorship might consider undertaking a course run by the Institute of Directors.
- Observing and fostering high ethical standards;
- Recognising and managing risk through identification, monitoring and control;
- Engaging in the development, approval and monitoring of company strategy;
- Structuring the board for a balance of skills, knowledge and experience, to provide effective oversight and add value.
A company may indemnify its directors and employees and take out insurance to protect them if the company’s constitution expressly allows for this. This includes insurance for liability for any act or omission when that person is acting in their capacity as a director. It may also include insurance to cover costs incurred by the director in defending or settling any claim relating to that liability.
It can also be prudent for directors to structure ownership of their personal assets to provide the best protection in the event of a claim against them. Often this will involve the director’s home and other personal assets being purchased by or transferred to a family trust.
Where to next?
The above information provides a very brief overview of some matters for company directors to consider. It is important that legal and accounting advice specific to a director's individual circumstances is taken. If you require any further information about your responsibilities as a director, or options for protecting your personal assets, please feel free to contact our commercial team using the details below: