Financial mismanagement, misappropriation of funds and extravagant travel costs. And no, this time we’re not talking about politicians.
This time it was a charity (and you can find out exactly what went on there in the attached press report below). But it could have just as easily been someone whistle-blowing on a business (typically a disgruntled customer or an employee). This is a good argument not just for acting lawfully, but also for looking after your customers and your employees so they aren’t incentivised to ‘tell on you’ or to start suspicions about your business integrity.
Trustees have specific legal duties and one of the most important is that trustees should not put themselves in a position where their personal interests conflict with their duty to act in the interests of the charity unless they were specifically authorised to do so. The Charities Commission has issued specific guidance on this topic which can be found here.
Just like trustees have a list of duties, so do directors of companies.
Who counts as a ‘director’ under UK law?
This is a good question. There is no specific legal definition of a ‘director’ but it does extend a lot further than simply what’s written on a job description. Anyone (whatever their title) that is practically responsible for the management of a company’s affairs, its operations and strategic decisions may be classed a director. Also, if you’re in a managerial role with the potential to influence decisions, represent and bind a company to contracts and/or other commitments, you may in fact be a ‘director’.
So, what general duties does the UK law impose on company directors? Here’s a reminder:
- Comply with the rules of the company as set out in the articles of association and exercise your powers for those purposes;
- Exercise independent (rational and impartial) judgement;
- Further the success of the company for the benefit of the members (not yourself)
- Avoid a conflict between your personal interest and that of the company;
- Tell the shareholders about any interest or potential interest (direct or indirect) in proposed transactions;
- Not to accept benefits from third parties if the benefit is linked to you fulfilling (or not fulfilling) your duties as a director;
- To exercise reasonable skill, care and judgement in relation to the company’s affairs.
Now that you know what your duties are, you should also be aware of the consequences of a breach of any of these duties.
If you break these rules, the company or its shareholders (with the court’s permission and in the name of the company) can take legal action against you personally.
If you’re threatened with legal action, you’ll need to be able to argue (and evidence) that you’ve in fact acted reasonably and honestly, to avoid penalties which may include a court order to pay money (called ‘damages’) in compensation to those suffering harm caused by your actions. An example of acting reasonably and honestly would be if you can demonstrate that you acted on advice from your accountant or a lawyer, believing that advice to be sound, and even if that advice proved to be wrong.
We’re going to be blogging more on the topic of directors and their duties in the coming weeks. Keep an eye out for our next instalment, containing pragmatic and useful information to keep you on track if any of the above applies to you.
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The most recent public sign of Broken Rainbow’s financial crisis came in April this year when BuzzFeed News reported that it was facing imminent closure, according to staff, unless it received “£25,000 in the next 48 hours”. The small charity, with a clutch of employees and a handful of volunteers, which was set up in 2002 and claimed to help 10,000 people a year, appeared to be on the brink. This was despite high-profile endorsement from a wealth of celebrity supporters including Sir Ian McKellen, Caroline Lucas, and Stephen Fry.