Do we really need to issue contracts to Company Directors when we have the Companies Act to rely on?

Officially, a director is an officer of the company and not an employee. As such, he or she has no right of remuneration unless the company's articles state otherwise. In theory, therefore, he or she will not need an employment contract or agreement. However, the director may also be employed in another capacity - e.g. as a finance or managing director. In that instance, he or she will be considered an executive director and will require an employment contract. 

So, Why Do Directors Not Necessary Require A Contract?

Directors are tasked with managing the day-to-day business of a company and owe a wide number of duties to it, including the fiduciary duties of good faith and loyalty, common law duties of skill and care, and the equitable duty of confidence.  A fiduciary duty indicates a relationship of trust, assurance or confidence between two or more parties.

The Companies Act 2006 defines a director as 'any person occupying the position of director; The Companies Act 2006 is the main piece of legislation which governs company law in the UK.

The aim of the legislation is to codify director’s duties, to grant improved rights to shareholders, and to simplify the administrative burden carried by UK companies.

Therefore, as statue exists, setting out the obligations of all company directors, a separate contract many are not deemed necessary.

What are the Legal Duties Directors Have to A Company?

Traditionally, and most fundamentally, a director had to act at all times in good faith in what he considered was the best interests of the company. Other duties include;

  • The duty to act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred
  • The duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard to various matters
  • The duty to exercise independent judgment
  • The duty to exercise reasonable care, skill and diligence
  • The duty to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
  • The duty to not accept a benefit from a third party conferred by reason of the director being a director, or their doing (or not doing) anything as director, and
  • The duty for the director to declare if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and ex-tent of that interest, to the other directors.

What Action Can Result From A Breach Of The General Directors Duties?

If a director breaches one or more of the general duties:

The company may have grounds to bring a civil action against the director, or

The director may be disqualified if they are shown to be unfit to be concerned in the management of a company as a result of the breach

  • Damages or compensation
  • restoration of the company's profits
  • an account of profits made by the director
  • rescission of a contract

Why Should Companies Issue A Contract?  - Ultimately for Protection

...For the Company

 A non-Compete clause is a common feature in employment contracts for senior staff and should always be included in a Directors Agreement.  They are used where the company wishes to protect its legitimate interest by requesting the director agree to the terms of the restrictive covenants contained therein. Restrictive covenants provisions afford greater protection to the employer/Company.

Non-Compete Covenants prevent

  • employees/directors, or ex-employees from being involved in a competitor business.
  • Non-Solicitation Covenant prevents employees/directors or ex-employees soliciting business from clients/prospective clients or suppliers.
  • the employee from enticing away his/her former colleagues.

…….and of the Director

A director may be exposed to certain liabilities as a director. The Companies Act 2006 contains a general prohibition against exempting or indemnifying directors against any liability that would otherwise attach with any negligence, default, breach of duty or breach of trust. However, there are statutory exceptions to this prohibition, including:

  • A company may acquire and maintain insurance for its directors, or those of an associated company, against such liability, and
  • A company may provide an indemnity for its directors, of those of an associated company, against certain liabilities, provided that such indemnity is a qualifying third-party indemnity or a qualifying pension scheme indemnity.

 

An Executive Employment Contract is suitable for senior management employees where confidentiality and non-competition clauses are important. Along with all the standard employment contract clauses, such as sickness, holiday, retirement, pension etc, an Executive Employment Contract contains a number of special clauses that are appropriate to employees working at a senior level, including a Working Time Regulations opt out, an annual salary review, clauses covering benefits, car and health insurance, anti-bribery, exclusivity of service.

A Directors Agreement normally mirror these terms contained within an Executive Agreement.

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