Business Soapbox: Celia Worthington
We ask an expert about the legal problems that directors could possibly face
Recent cases show it is important to comply with company act provisions, its constitutional rules and keep an accurate record of proceedings
Recent case law is an important reminder to directors of the statutory code regulating their duties as set out in the Companies Act 2006.
This code applies not only to properly appointed directors but also to persons who are "de facto" or "shadow" directors.
A person could be a de facto director if they were the sole person directing the affairs of the company or, if there were other true directors that he or she was acting on an equal footing with in directing the affairs of the company.
A shadow director, on the other hand, does not purport to act as a director and nor does he or she claim to be a director.
Shadow directors are persons in accordance with whose instructions the directors are accustomed to act (excluding professional advice).
A case concerning director's duties involved the Dragon's Den star, Theo Paphitis who was a director and majority shareholder in Ryman Group Limited.
Mr Anthony Kleanthous, a shareholder in Ryman Group, sought permission to bring an action in the name of the company against Paphitis and other directors in relation to the purchase some years before by Paphitis of the lingerie business La Senza.
Ryman Group had an opportunity to purchase La Senza but had not done so and the opportunity and funding was then provided to Paphitis and others who acquired the company.
The entire transaction had been approved by the board of Ryman Group. Kleanthouos hoped to take the action on behalf of the company because he disputed the events surrounding the disclosure and approval.
He was alleging that Paphitis and the other directors had used company assets for their own benefit and had diverted a business opportunity away from the company. Kleanthous's case to bring the action was unsuccessful as the judge did not consider the claim to be of sufficient strength mainly because the transaction had been approved by the Ryan Board and there were detailed records of meetings.
Directors need to be aware of their statutory duties: to act within the company's powers; to promote the success of the company; to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties and to declare interest in proposed transactions.
The Paphitis case illustrates the need to comply with company act provisions regarding declaration of interest, to follow the company's constitutional rules and keep an accurate written record of matters.
Celia Worthington, Senior Partner of the commercial department of Worthingtons Solicitors, Belfast office can be contacted on firstname.lastname@example.org