At risk – Companies and Directors
The most likely entity that a foreign company establishing itself in the UK will form is a limited liability company.
A. Limited Liability company and its shareholders
A limited liability company will create a barrier of protection between risk and its shareholders. Shareholders cannot be liable for more than the amount they have committed to pay for their shares.
B. Limited Liability Company and its Directors
Directors are responsible for the day to day running of a company and bear far greater risk.
There are many ways in which directors can become personally liable for their actions. Generally. liability arises from getting something wrong, either related to how a director has behaved relative to the Company’s interests or because s/he or the Company has committed a crime.
Considering the relationship between a director and the company is a good place to start because a breach of duty can give rise to liability.
Directors’ duties are now governed by the Companies Act 2006 (“CA 2006”) which sets out seven general duties. To:
- act within powers (s.171 CA 2006)
- promote the success of the company (s.172 CA 2006)
- exercise independent judgment (s.173 CA 2006)
- exercise reasonable care, skill and diligence (s.174 CA 2006)
- avoid conflicts of interest (s.175 CA 2006)
- not accept benefits from third parties (s176 CA 2006)
- declare an interest in a proposed transaction or arrangement (s.177 CA 2006)
The following expands these duties further:
- A director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred, having regard to the company’s constitutional documents and decisions taken.
- A director must act in the way s/he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. A director must have regard (amongst other matters) to the:
- likely consequences of any decision in the long term
- interests of the company’s employees
- need to foster the company’s business relationships with suppliers, customers and others
- impact of the company’s operations on the community and the environment
- desirability of the company maintaining a reputation for high standards of business conduct
- need to act fairly as between the shareholders of the company
This duty applies to all decisions made by a director, not merely formal decisions made by the whole board. Expert advice should be taken when necessary.
- A director must exercise his/her powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise (unless authorised by or under the constitution to do so).
- A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both 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 (the objective test), and
- general knowledge, skill and experience that the director actually has (the subjective test)
Directors must be sufficiently qualified and experienced to fulfil the functions that they might reasonably be expected to carry out. A particularly highly qualified or experienced director will be obliged to exercise a high level of skill and expertise. A director will be required to stay informed about the company’s affairs.
- A director must avoid situations in which s/he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests.
- A director must not accept any benefit (including a bribe) from a third party which is conferred because of him or her being a director or doing or not doing anything as a director.
- A director must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. There is no breach of these duties if a director is not aware of his/her interest or if the interest cannot reasonably be regarded as giving rise to a conflict.
C. Personal Liability
- Typically, a limited liability company will protect its directors. However, the corporate veil can be pierced, and directors can be found personally liable, for breaching their duties: also, in cases or fraudulent/wrongful trading, making false misrepresentation and for misfeasance of company funds and for offences such as false accounting and regulatory offences.
- Companies will be liable for the debts that they take on and the obligations that they enter into. They can also be fined for an increasing number of breaches of law, relating to GDPR, health and safety, bribery and corruption, product liability etc. Companies can also become vicariously liable for the actions of their employees.
- Ratification by Shareholders
Section 239 Companies Act permits shareholders by ordinary resolution (50%+) to ratify any negligence, default, or a breach of duty by passing an ordinary resolution. This can also take the form of a written resolution. However criminal conduct can not be excused.
D. Trading Risk
The biggest ongoing risk for a business is of course not performing well and reasons for that are varied including: Pandemic, political upheaval, cashflow issues resulting from for example major customer failures, unpaid debts, changes in law, disruptive technology, etc. Excellent management can mitigate the impact of some of these, but not all.
E. Insurance – is not just a policy that you pay for
Taking out effective insurances is helpful. Some insurances are compulsory, and others are highly recommended. A good insurance broker will ensure that you a company obtains the best policies best suited to its activities and relevant risks.
The best level of protection arises when a company acquires knowledge requisite to its practice areas and sectors and adopts good practice and robust internal processes. Such a process needs to be driven from the top.
Combined with that approach, a company needs excellent paperwork and smart structuring which can be significantly mitigate risk. Valuable IP can be kept separate from the main trading company. Risky assets can be taken into a separate subsidiary. Proper contracts and terms and conditions can ensure you limit liability and risk, to the extent the law allows.
Part of that rigour involves ensuring that a company has very robust IT systems and excellent IT personnel to ensure business disruption is minimised, that data is kept safe and troublemakers are kept out.
Our sincere thanks to Michael Hatchwell, Head of Corporate Finance at Child & Child for this excellent article. If you have any questions then please do reach out to your team at email@example.com and we will be delighted to support you.