Legal Question in Business Law in United Kingdom

Re: Starting a new company

The legal responsibilities of directors are numerous and extensive. Unfortunately for the layperson who acts as director, there is no exhaustive list of legal responsibilities which must performed and list of actions which must be avoided.

Instead, all common law jurisdictions prescribe a general 'scope' of legal responsibilities (known more commonly as 'directors' duties') which must be observed.

The starting point in understanding director's duties is the common law, which imposes fiduciary duties owed to the company whose interests the directors are appointed to manage. In addition to this, a matrix of statutes and regulations in most jurisdictions impose additional duties, and punish failures to discharge these duties. Directors may be held to strict liability in the requirement to faithfully discharge their duties. Paramount is the duty to act with reasonable skill, care and diligence.

Directors sometimes lose sight of the fact that their duties are owed to the company and not the shareholders. Directors are required to act in the best interests of the company, and not just in the interests of the shareholders, who will in many instances be themselves. The law also requires that directors take into account the interests of a range of stakeholders including shareholders, employees and creditors. Difficulties (and legal liabilities) can arise in practice where these interests are in conflict.

In assessing whether a particular director's actions have fallen below the required standard, regard will be had to the standard expected of the ordinary prudent man. Where directors possess special qualifications (eg: a lawyer or accountant) they will be held to an even higher standard of skill.

In practise, directors are required to maintain adequate accounting records, and the general duty to act with reasonable skill, care and diligence surely extends to taking action to safeguard shareholders' investment and the company's assets. Directors are required to act in the company's best interests, not guarantee success of the company's commercial endeavors. Accordingly, directors are generally not held liable for mere errors of judgement.

You should also note that the circumstances and standards against which a director's actions will be judged may vary in the circumstances. For instance, most jurisdictions require a higher standard of prudence and skill from directors in insolvency situations. The result may be that directors' actions which ordinarily would bear scrutiny while the company is solvent may be regarded as having fallen below the required standard during a period where the company finds itself in financial difficulty.

All of this may sound somewhat abstract to you. However, to place it in practical and concrete terms, you should be aware that as directors, your actions will generally avoid liability if you can show that at all material times, you acted honestly and reasonably in the circumstances.

Re: Starting a new company

This is further to my earlier remarks regarding directors' duties generally. It may also prove worthwhile to review the summary article posted at www.sv.biz.findlaw.com/management/board.html which provides some good illustrations (more oriented toward the US context) of the points I raised.

If you have any specific issues which require legal expertise, I recommend you to contact a lawyer.