Until the introduction of the Irish Companies Act 2014 ("Act"), the duties of a director of an Irish company were governed by over a century of case law. Fortunately for directors, companies and their advisers, the Act codified these duties. This note addresses some of the frequently asked questions raised of us by our client companies and their directors.
Who owes a duty?
Under the Act, every person "occupying the position of director" is regarded as a director, even if not formally appointed e.g. shadow directors and de facto directors. The Act makes no distinction between executive and non-executive directors.
To whom do directors owe a duty?
Under the Act, directors' duties are owed to the company and the company alone. The directors do not owe a fiduciary duty to the shareholders merely by virtue of being a director of the company. However, case law suggests there may be specific circumstances whereby a director may have a fiduciary duty to a shareholder (e.g., where the director expressly undertakes certain obligations to the shareholders).
Can these duties be avoided?
The duties cannot be avoided. Directors are obliged to acknowledge their duties and obligations when consenting to act as a director.
What are the fiduciary duties?
Fiduciary duties of directors
The Act consolidates directors' common law and equitable duties, which have been developed by the courts, into eight duties. These duties are:
- Good Faith – A director shall act in good faith in what he/she considers to be in the interests of the company. This duty is a subjective duty and provides the sub-structure on which all other duties are built.
- Honest and Responsible – A director shall act honestly and responsibly in relation to the conduct of the affairs of the company. This is an objective test and will be judged by what the court considers to be objectively determined to be honest and responsible.
- Exercise of Powers – A director is required to act in accordance with the constitution of the company and exercise their powers only for the purposes permitted by law. The exercise of a power could have more than one purpose so the courts will look to see what the substantial purpose behind the exercise is and directors should understand the primary purpose of what is proposed.
- Benefit from Company Property – A director cannot use or benefit from company property or information, including business opportunities, by diverting them to themselves or companies controlled by them or other third parties, unless this is expressly permitted by the constitution.
- Unfettered Discretion – A director should not agree to fetter their discretion i.e. tie themselves down as to how in the future they will exercise their discretionary powers.
- Avoid Conflicts of Interest – A director must avoid putting himself/herself in a position where his/her personal interests conflict with those of the company.
- Care, Skill and Diligence – A director must perform his/her functions with care, skill and diligence. The care, skill and diligence required is the care, skill and diligence of a reasonable person in the same circumstances of that individual director and with the knowledge and experience that may reasonably be expected of a person in the same position as the director.
- Have Regard to Members' Interests – A director must have regard to members' interests, provided that he/she acts in the interests of the company.
Other than the fiduciary duties, what other obligations are there on directors?
Under the Act, there is a very comprehensive list of duties, obligations and liabilities imposed on directors. Many of these provisions are onerous. Every director of an Irish company should become familiar with the duties and obligations he/she owes to the company.
What happens if a fiduciary duty is breached?
A breach of a fiduciary duty under the Act may result in the director being held personally liable to the company and / or being restricted or disqualified from acting as a director in the future. However, the High Court is empowered to relieve a director from personal liability if the director has acted honestly and reasonably and where the court believes that, in the circumstances, the director ought fairly to be excused.
What defences / protections are there for directors?
Directors' & Officers' Insurance
Directors' and officers' insurance cover is available in Ireland and is intended to protect directors (or former directors) where an Irish company cannot or will not provide indemnities out of its own funds for director activities. Such insurance cover is complex and policies differ and specialist broker services should be sought.
What practical steps can be taken to mitigate risk of breach of fiduciary duty?
A company director can mitigate risk of a breach of fiduciary duty by:
- Best Interests – taking action in good faith and in the interests of the company at all times.
- Information / Understanding – ensuring he/she has a sound understanding of the business and has access to all information required to make informed decisions.
- Meetings / Resolutions – documenting all board meetings in minutes and any other material decisions of the board to record the decision making process and demonstrate that the directors were acting honestly and reasonably and with care, skill and diligence.
- Advisers – liaise with legal and/or financial adviser in relation to any material or important proposed company actions.
Conclusion
While the duties imposed on a director of an Irish company appear onerous, the risk of breaching these duties can be mitigated by having robust corporate governance policies and procedures in place and by seeking professional advice when required. Walkers can advise on all aspects of directors' duties.
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.
