Acting as a company director has many advantages but is fraught with dangers for the ill-informed and the unwary as a result of non-compliance with duties and obligations imposed by (1) common law; (2) statute; and (3) contract. The separate legal personality of a company is being ignored more resulting in the imposition of personal liability on directors. This note sets out briefly the main Irish common law and statutory duties.

Duties imposed by Common Law - a director must act in good faith and in the best interest of the company. He must avoid any conflict of interest between his own interests and the interest of the company. A director is in a fiduciary relationship with the company and must act in its best interest and not for any other purpose. Understandably a director must not act unlawfully nor outside the powers of the company nor outside the powers vested in him by the company's memorandum and articles of association. Directors do not need to have any specific qualification to act as a director of a company, however, they must act with due skill, care and diligence - the standard of which is measured or what would reasonably be expected from a person with the same knowledge and experience.

Caselaw has outlined the penalties that will be imposed for breach of the common law duties owed by directors. These include the exposure to personal liability and under the 1990 Companies Act a director he may find himself the subject of a restriction order or even a disqualification order.

Duties imposed by statute - the 1963-1990 Companies Acts impose a range of duties on directors both directly and indirectly. The following is a brief outline of some of the more important ones:-

  • The making of loans, quasi loans and credit transactions, the giving of security and guarantees to a director of the company is prohibited except in a limited number of situations. Breach of this prohibition makes a director liable to the company for all profits made as a result of the transaction and the director must also indemnify the company for any loss or damage suffered as a result of the transaction.
  • In order for a director to enter certain "substantial property transactions" (which involve non-cash assets in excess of IR£15,000 or 10% of the net asset value of the company) it is first necessary for them to receive approval from the shareholders at a general meeting. Breach of this provision makes the contract voidable at the option of the company and again the director will liable to the company for any profit and to indemnify the company for any loss or damage.
  • Directors are obliged to notify the company of their interests in shares or debentures in the company and the company will maintain a register of such interest. Non-compliance with this obligation exposes a director to criminal sanctions and will render his right or interest in respect of the shares or debentures void.
  • In insolvency additional duties are imposed:- 

          (a) if a company is being voluntarily wound up a declaration of 
              solvency must be sworn.  A director must have reasonable 
              grounds for stating that the company will be able to pay its 
              debts as they fall due otherwise he may become personally 
              responsible without limitation of liability for the debts of 
              the company;

          (b) a director will commit reckless trading in the 1990 Act, if 
              he is knowingly a party to the carrying on of business of a 
              company in a reckless manner.  As a consequence in the course 
              of liquidation he may be made liable for all or any part of 
              the debts of the company as a court may direct;

          (c) if a director knowingly carries on the business of a company 
              with intent to defraud its creditors or for any fraudulent 
              purpose then in the course of liquidation of the company he 
              may be made personally liable for all or any part of the 
              debts or liabilities of the company as the court may direct. 
              Criminal sanctions may also be imposed for fraudulent trading 
              - on summary conviction, up to 12 months' imprisonment and/or 
              a £1,000 fine and on indictment, up to 7 years' imprisonment 
              and/or a £50,000 fine.  While difficult to prove, convictions 
              can be obtained.  Recently, an insurance and investment 
              broker, whose firm collapsed with debts of more than 
              £2,000,000, was sentenced to over 4 years' imprisonment and 
              was also disqualified from acting as a company director, 
              auditor or manager for 10 years for carrying on business in a 
              fraudulent manner.

  • Other statutory duties include the obligation to convene AGMs and EGMs, to keep minutes of those meetings and to keep proper records and books of account. At the incorporation of a company a director is expected to make a complete and honest account of all relevant personal information including personal details, interests in contracts held in the company and interests in other companies. A director is under a duty to use a proper name of a company on all invoices, letters, cheques etc. issued by the company. Breach of any of these provisions will expose a director to liability.

Directors' duties are owed:-

  • Primarily to the company.
  • To shareholders - only if a director undertakes to act for a shareholder and creates a fiduciary relationship. 

          - Where a director acts in an oppressive manner or in disregard 
            of a shareholder's interest.

          - If a  director fails to disclose to shareholders payments made 
            to the director in connection with the transfer of shares in a 
            company.

  • To creditors - directors owe a duty to creditors under statute. At common law the picture is less clear, but the general trend appearing is that directors owe a duty to their creditors when the company is insolvent.
  • To employees - under the Companies Acts directors are obliged to have regard to their employees. However the obligation is owed to the company and enforceable only in the same manner as any fiduciary duty owed to the company.

From the above it can be seen that acting as a company director is an onerous task, dangerous for the unwary but less so for the better informed. More increasingly breaches of duty result in the imposition of personal liability highlighting the need to understand the duties and responsibilities which are imposed by law on directors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.