How important are directors’ duties?

We sometimes speak with clients, especially in a dispute situation, where they inform us that being a director of a company is ‘just a title’ or ‘it didn’t really mean anything’ or ‘I didn’t get involved in the business side of things’. 

Unfortunately, comments like that get a red mark from a solicitor and a ‘must try harder’ comment. The responsibilities and duties of a director are significant, and a recent court case is a reminder of that. 

TMG Brokers Limited (In Liquidation)

This is a case from 2021. TMG had been placed into liquidation and the liquidator, whilst investigating TMG’s accounts, noted a series of payments authorised by TMG’s directors, Director 1 and Director 2. 

The Liquidator subsequently applied for declarations under Section 212 of the Insolvency Act 1986 in relation to those payments on the basis that the payments were made without proper authority. The Liquidator claimed these payments were disguised contributions of capital and that both directors were in breach of their fiduciary duties in accordance with the Companies Act 2006.

Director 1’s position was that he had received a single payment from TMG’s account which he thought was salary and which he repaid to TMG when he realised it had not been properly accounted for. He also accepted a further payment as reimbursement of legitimate expenditure. Director 1 went on to plead that Director 2 had control of TMGs finances and that any other payments were made without his knowledge or consent, albeit he trusted Director 2 to handle TMG’s finances appropriately.

Decision

It was held by the Court that the payments were made without proper authority and therefore amounted to disguised contributions of capital.

The fact that Director 1 had placed his trust in Director 2 to handle TMG’s finances was not deemed a valid defence in this particular case and the judge held that Director 1 had failed to exercise reasonable skill, care and diligence in accordance with his duties as a director. At the very least, Director 1 should have put some measures in place to check that TMG’s finances were being dealt with correctly by Director 2.

Both directors were held jointly liable for repayment of the sums in question to TMG.

Comment

This should act as a reminder to all directors of their fiduciary duties. Whilst each director of a company may undertake a different role and responsibility it does not absolve the other directors from that area of responsibility.

As a director you should, from time to time, check-in and remind yourself of your duties. You should remain involved in all areas of the business, even if the day-to-day duties are carried out by another director and should ensure that you maintain at least a check and watchful eye over the activities of the business.

DISCLAIMER: The information and opinions expressed in this article does not address individual requirements and is for informational purposes only. It does not constitute any form of legal advice and should not be relied on or treated as a substitute for specific advice relevant to your particular circumstances.