Are you a director who wants a relief from liability after starting a company UK ?


Directors are the key members of a company that manages all the departments and take decisions that are in best interests of the company. So, getting the information about how to register a company UK and different Sections of Companies Act 2006, that will guide about the director’s duties will be every beneficial for newbies who are setting a business UK. In this article, we will explore Section 176,177 up to Section 183 of Companies Act 2006, about the director’s duties.

 

Section 176 of Director’s Duties

 

According to Section 176 of Companies Act 2006, for company incorporation UK, director is not entitled to receive any benefits from third parties either because of his designation as a director or his actions as a director. The bribe or property acquired as a bribe for principal will be on constructive trust.

 

Section 177 of Director’s Duties

 

Section 177 deals with director duty to declare his interest in a proposed transaction or arrangement. According to Section 177 (1), it is mandatory for a director to declare the nature and extent of his direct or indirect interest in proposed transaction with company either for and under Section 177 (4), this must be done prior to company enters in transaction. According to Section 177 (3), further declaration should be made by director if the declaration made by him is inaccurate and incomplete. According to Section 177 (5), it is obligatory to declare only those interests about which director has knowledge and in light of Section 177 (6), it is not necessary to declare the interests about which other directors know already and if director himself is not aware of proposed transaction and also not necessary to declare interest if there is no conflict of interest. If the disclosure duty is not satisfied than there will be breach of director’s duties and the new disclosure should be made and vice versa. The full and frank disclosure should be made by a conflicted director on the board decision of carrying out a proceeding and the conflicted director is not allowed to vote in this regard and does not contribute towards quorum requirements under article 14 and 16 of Model Articles.

Remedies for breach of Section 177

The same remedies apply as for equitable remedies but a problem associated with it is that disclosure is not required by any equivalent equitable duty. Lady Justice Arden accepted duty or disclosure for fiduciaries in accordance to an account of profits and according to Lady Justice Arden and Parker director is strictly liable and is even accountable for profits earned from breach when the company has entered transaction. However, it has come under criticism, this would be consistent with the parliament intention of using Section 177 in replacement of self-dealing rule. An account of profits is required by this rule in case of any breach. According to Lady Justice Clarke, Director is not liable for profits earned through disclosure of interests and also not liable if company has entered into transaction despite of disclosure. Director is liable for compensating loss caused due to conflict of interest and as soon as he conceals his interest he commits a breach of duty and is liable to compensate for loss but company cannot claim for equity compensation from director if it enters in transaction even director has disclosed his interests.

 

Rescission

 

It is possible for company to rescind a transaction. The rescission is possible only if breach has been ratified by the board, restitution is impossible or bona fide rights for value has been acquired by the third party. But ratification can only be done after fiduciary discloses in a full and frank manner. Rescission is not possible if a director sells the property acquired by him to a purchaser without notifying him of value and director is liable for profits earned through selling the property even if rescission is not possible.

Rescission in case of director’s indirect interest

The company will be liable for full account of profits in case fiduciary receives 100% profits and company will be liable for account of profits or rescission if the fiduciary conducts a breach.  If a transaction is made between director of company A and company B than due to fiduciary’s interest in company B the company B is still liable to rescind the transaction even it has no connection with fiduciary. The rescission is only available if there does not exists any loss to rescission means there is no damage caused due to company B to transaction in terms of good faith and the director cannot show transaction to be fair. The rescission is also possible if other company is one-man company, director has connection with company.

 

Remedies in case of unavailability of rescission

In case of breach of fiduciary duty, the director will be liable to pay profits he earned from breach. The idea is to come as close to undoing the transaction as possible. Director should compensate for loss in case rescission is unavailable. Under Section 179, duties are cumulative and are liable under different categories.

 

Section 180 of Director’s Duties

 

According to Section 180, the board has authority to authorise any conduct which causes breach of duties. and this will also help to prevent any liability which comes in case of breach in case duty of disclosing interest has also been complied.  According to Lord Radcliffe, director should properly declare and inform the recipients about his interests rather than by simply stating them. It is mandatory to take consent and authorisation from members if a transaction requires it and also transaction should be complied with general duties. According to Section 180(1), transaction cannot be set aside if company has decided to enter into transaction and director has fulfilled the duties mentioned in Section 177.  Section 180 (4) preserves shareholders ability of authorising a duty breach and preserves company constitution regarding Section 177 and 175to manage and deal conflict of interest respectively. According to Section 180 (5), the general duties except covered by Section 180 (4) are mandatory and cannot be waived constitutionally. The provision is considered to be void and null if it pretends to support the idea of exempting director from liability in case of breach of duties related to fiduciary. The matters which are related to conflict of interest are dealt by articles.

 

Ratification of breach under Section 239

 

The director’s breach of duties can be ratified by members by passing of an ordinary resolution. In voting process for ratification, director cannot vote in his support and the director is not considered eligible if the vote casting is done by written resolution but director may contribute towards the quorum and can speak in the matter if voting is done in a meeting however he cannot cast a vote in a meeting.

Declaration of interests under Section 238

 

It is necessary for directors to declare their interests in existing transactions and arrangements and it is important to continuously update Section 177 according to any circumstances changes and is does not apply when there is no information of interest or the transaction and there is no conflict of interest and also if the directors already know about it. It is a crime to do breach of Section 282 under Section 283. The transaction validity is not affected by a breach of Section 282.

 

Constructing around the duties from Section 171 up to 177

It is considered as null and void to try to exclude any liability in case of any breach and negligence under Section 232 (1). But according to Section 232 (4), dealing with conflicts in articles is allowed. The rules of Section 177 and largely on Section 175 can be dictated by articles.

Section 182 of Director’s Duties

 

According to Section 182 of Companies Act 2006, after company incorporation UK it is mandatory for director to declare his direct or indirect interest in a transaction in which company has already entered. He only needs to do this to extent if he has not declared his interest.

The director should made declare his interest whenever he finds it reasonably practical and further declaration should be made by a director if it is not accurate and complete.

Section 183 of Director’s Duties

 

According to Section 183, director is liable to pay fine if he breaches a duty and there are no civil sanctions against director in this regard.

 

Relief from Liability

Prior Authorisation

According to Section 180 (4)(a), in case of breach of duty by director, company’s members can be authorised in advance. In light of Section 180 (4)(b), there can be a provision in company’s articles for the management of situation after director’s conflict of interest is discovered. The procedure dictated by the articles should be followed by director if he has disclosed his interest in a transaction. There is no breach of director’s duty if director fulfils the Sections 175 and 177. There is no limit to way in which conflict of interest has to be dealt with for Section 177. The limitations for Section 175 are listed in Section 175(6) according to which director is not permitted to ever participate in a transaction either to vote or to contribute towards quorum requirement when he disclosed conflict of interest.

 

Subsequent Ratification

According to Section 239, it is possible for members to ratify any breach by passing an ordinary resolution and the director’s vote is not considered in this regard. The disclosure should be full and frank according to Section 239 (7). If director is involved in misappropriating funds of company than ratification is not valid. The liquidator has authority to make a proceeding against director despite of the fact that the director’s acts have been ratified by the members. Regarding liquidator authority in this context Lady Justice Dillon said that in case that consent has been given by members than liquidator cannot do anything and in view of Lady Justice May, liquidator can perform action without consent of members.

Contracting out of Liability

Under Section 232, provision which intends to exclude director for being liable for breach is considered null and void but company can make provisions to deal with conflict of interest.  Previously it was suggested by Movitex that articles can exclude director from liability in case of breach. However, today there are two possibilities.

One possibility is that movitex is not applicable today means that the rules which are relate to duties are not duty, which is opposite to Companies Act 2006, in which rules related to duties are considered as duties. The other possibility is that it is applicable today. Previously it was thought that according to Section 232 (4), it is possible to exclude provision of liability from article but this is not possible today.

Relief from Liability by Court

Under Section 1157, the relieve can be provided to director by court if court finds out that he has acted in an honest and reasonable manner and his excuses are fair. If a loss occurs at the time of registration by the negligence of director about setting a business UK than relief can be provided. This can be used in relation to Section 174 where either director has all shares so he can take a risk or director’s misconduct is not large.

Lastly, the Sections about director’s duties of Companies Act 2006 discussed in this and the previous articles should be followed by a director when starting a company UK or while performing company’s operations.

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