What are your duties as a company director?
Justin Cumberlege, a Partner in the healthcare law firm Hempsons, provides advice to practice managers on becoming directors of companies.
First published in Practice Management in April 2022
Many primary care networks (PCNs) are now forming companies to deliver the PCN services, to limit the liability of the partners of the practices and to create ‘cost sharing groups’ to avoid the risk of having to charge VAT.
Practice managers, with their knowledge of running the business of practices, are asked to be directors of these companies. While the liabilities of the shareholders are limited, those of the directors are greater.
Directors are subject to seven general duties under the Companies Act:
- To act within their powers – directors must act in accordance with the constitution of the company and only exercise their powers for the purposes for which they are conferred.
- To promote the success of the company – directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole.
- To exercise independent judgement – directors must exercise their powers independently, without subordinating their powers to the will of others.
- To exercise reasonable care, skill and diligence – meaning, in the words of the Act, the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.
Paragraph (b) is subjective: you must exercise your skills on the company’s matters.
Paragraph (a) is more objective, requiring that all directors must keep up to date with the activities of the company and participate in the decision making, using the skills and knowledge they have.
- To avoid conflicts of interest – directors must avoid situations in which they have or can have a direct or indirect interest that conflicts with the company’s interests. Having a robust conflicts of interest policy is important.
- Not to accept benefits from third parties – directors must not accept any benefit (including a bribe) from a third party which is conferred because of their position as director.
- To declare an interest in a proposed transaction or arrangement with the company – directors must declare the nature and extent of their other interests.
The shareholders may authorise the directors to do or omit to do something which might otherwise be a breach of duty.
Remedies for the company and others enforcing breaches of duty by directors include compelling the directors to do or refrain from doing something; and damages to compensate the affected party for their losses.
If a director is found liable for wrongful or fraudulent trading or misfeasance, they could be required to contribute to the company’s assets, although this is rare in practice. Fraudulent trading is also a criminal offence, as well as being disqualified from being a director in the future.