Calling all Directors...Part 1

Here at Sewell Law, we work with lots of Directors and decision makers. Directors come in all shapes and sizes. There is no exam to pass or qualification to take before being appointed a Director. Sometimes Directors do not fully appreciate the duties and obligations on them. This can lead to a Director finding themselves in hot water and needing our assistance. We are here to help. This is a large topic that we explore in this series of blogs. There are seven statutory duties contained in the Companies Act 2006. This is the first in the series and considers the duty to act within powers. 

Section 171 of the Companies Act 2006 – Duty to act within powers

The first statutory duty is the duty to act within powers. 

Directors are given their powers by the company’s constitution. What we mean by the constitution is the company’s Articles of Association, contracts between the officers and owners of the company, like shareholders’ agreements and Directors’ service contracts and resolutions made at Board meetings or meetings of the shareholders. What are the Articles of Association? The Articles of Association are the written rules about how the company is to be operated. They include things like the purpose of the company, its structure, how directors are appointed, how shares are issued and change hands, how dividends are paid and how decisions are to be made by the directors and shareholders.

A Director must act in accordance with the company’s constitution and only exercise their powers for the purpose for which they are conferred.

So what does that mean in practical terms?

A recent case example involved a sole Director who arranged for the sale of the company’s premises. When the proceeds of sale were received, the Director made substantial payments to himself and third parties, one of whom was his father. The Director attributed the payment to “salary”, re-payment of a loan to the company and redundancy pay for the Director.  

The payments made by the Director forced the company into liquidation and the Official Receiver investigated the situation. The Official Receiver claimed that the Director had conducted an “informal” winding up of the company which, left the company’s creditors out of pocket to the tune of £1,837.428.

The Director produced no agreement or other documentary evidence of the alleged loan; nor was there any evidence of a salary having been approved for him by company resolution. There was also no evidence of any employment relationship between the Director and the company, or any other entitlement to remuneration. The director was not, therefore, entitled to redundancy pay. The payment of "salary", if that was what it was intended to be, was therefore paid in breach of the company's Articles of Association and of the director's duty to act in accordance with the company's constitution provided for by Section 171 of the Companies Act 2006.

Keep an eye out for our blogs discussing the other Directors’ duties.