What is the difference between an executive director and a non-executive director?
An executive director (ED) is a member of the board of a company who also has management responsibilities. A non-executive director (NED) is a board member without responsibilities for daily management or operations of the company/organisation.
A NED has the same legal duties and responsibilities as an ED; there is no distinction drawn between the two by law.
Where the words director or directors in this briefing note, this includes both EDs and NEDs.
What are a director’s duties? Directors have a fiduciary relationship with a company, which imposes upon the director duties of loyalty and good faith; they are agents of the company and have a legal and ethical responsibility to act in its best interests. Directors are also required to comply with a series of statutory, common law and equitable obligations.
We have listed these duties below, together with a brief explanation of how they might apply in the context of your directorship with a limited company (the Company).
Duty to act in good faith and with due care
When exercising your powers and discharging your duties, you must act honestly and in good faith with a view to the best interests of the Company.
This test is not purely objective; it imports the idea of what you consider to be in the best interests of the Company.
“The Company” means the shareholders as a whole and includes all present and future shareholders. This test assumes that the Company will continue as a going concern. Directors should therefore balance the long term interests of their company against the short term interests of the current shareholders.
You must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The level of care, diligence and skill expected is that of a reasonably prudent person. You are not required to be an expert in the type of business which the Company promotes, unless you are appointed to the board of directors because of your specialist qualifications. However, there is a higher standard of care, diligence and skill imposed if a director’s subjective abilities and skills are able to meet a higher standard than that of a “reasonable director”. This would apply if, for example, a director was a qualified accountant and was appointed to advise a company on its accounts and other financial matters. The standard this director would be required to meet is that of similarly qualified accountant who would have managed that company’s affairs under the same or similar circumstances.
NEDs cannot simply leave the management of a company to the EDs. A NED is expected to participate actively in decision-making, not merely to do what he or she is asked or told to do by others without considering the matter. In order to participate actively in such decision-making, NEDS are under a duty, as a minimum, to oversee and keep themselves sufficiently informed about their company’s affairs.
You must exercise your powers for the purposes for which they were granted and in accordance with the Company’s Memorandum and Articles of Association.
If a director is, bona fide, exercising his or her powers for the purpose for which they were granted (and in accordance with the Memorandum and Articles of Association), the court will not interfere. An example of a situation where powers have been exercised for an improper purpose is where directors issue shares, but do so to maintain or obtain personal control of a company in their capacity as shareholders.
The directors may appoint auditors to examine the accounts and prepare a report following their examination. However, the appointment of auditors is optional for a private company, and there is no legal requirement to do so.
Other liabilities of a director
As well as having liability for any breach of the duties described above, you could also be liable in the following situations:
Breach of warranty of authority
Directors are responsible for conducting the business of a company in accordance with its Memorandum and Articles. Where a director acts outside of his authority, a third party dealing with him will have a direct right of action against for breach of warranty of authority.
Tortious or criminal liability
Directors are agents of the company. Therefore, where a director instructs a company to commit a legal wrong (tort) or a crime (such as tax evasion) he will be personally liable as well as the company, even though the tort or the crime was committed by the company and not the director.
The Law requires that before a company pays any distribution or dividend to its shareholders, the directors give a statement of solvency regarding the company’s expected financial position for the next 12 months. A director may be liable for failure to follow the authorisation procedure required by law.
Acting while disqualified
A director who has been disqualified by the courts and acts as a director or takes part in the management of a company, in breach of that order, will be criminally liable and personally responsible for the liabilities of the company incurred during that time.
Acting as a director during insolvency
Where a director’s personal property has been declared to be en désastre, he must immediately resign any directorship he has, or may become criminally liable.
A director may be liable for wrongful trading when he knows (or is reckless about the fact) that the company is likely to go into insolvent liquidation and he fails to take action to minimise the potential loss to the company’s creditors.
Where a company is insolvent and it appears that any business of the company was carried on with an intent to defraud creditors, or for a fraudulent purpose, a director who was knowingly a party to the fraud may be personally or criminally liable. (This liability is limited to the company’s unpaid debts and liabilities.)
Please note there are also other situations relating to the insolvency of a company where a director may be personally liable, which we have not gone into detail in this note.
Articles of association
It is possible for additional directors’ duties to be set out in the Articles. These could be specific duties or a general sweeping up provision which says something to the effect of: the board of directors will remain responsible for the overall direction and conduct of the business of the Company, which invariably overlaps with the obligations we have mentioned above.
A director who exercises reasonable diligence and honesty is unlikely to find himself or herself liable for wrongful or fraudulent trading under Article 177 or Article 178 of the Law. However there are a number of specific actions you can take to try to mitigate risks:
Obtain professional accounting and legal advice.
Hold regular board meetings. Make sure minutes are taken and circulated, and that you as a director review minutes and correct anything you regard as requiring correction.
Actively take steps to ensure you receive regular, up-todate financial information about the Company.
Article 177 (responsibility for wrongful trading) looks to the moment in time at which you knew the Company no longer had a reasonable prospect of avoiding winding-up/désastre. To address this, directors should ensure that board minutes clearly document all potential sources of finance and options explored by the board, and put relevant dates against each such effort.
The board may elect to set some milestones by which to measure the Company’s progress in trying to avoid a winding-up, such as by securing the payment of outstanding debtors or improvements in efficiency.
The board should not incur substantial additional liabilities until other finance is secured. You ought to bring concerns to the attention of other board members and insist that steps are taken to minimise potential loss to creditors (Article 177(3) of the Law).
Click below to read the article. Directors duties in Jersey