Tier 1 Entrepreneur Visa Holders – Do You Understand Directors’ Duties Under English Law?
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For Tier 1 Entrepreneur Visa applicants who are setting up a limited liability company in the UK or investing funds into an existing company and planning to act as a director, it is imperative to understand your duties and responsibilities under English law. Codified in the Companies Act 2006, there are seven duties in total which directors must comply with or face disqualification and/or be made to pay compensation.
Tier 1 Entrepreneur Visa holders must register as a director of a company within six months of entering the UK. When it comes to complying with director’s duties, it is imperative to note that if a director of a UK company breaches his or her duties, they may be personally liable to the company. In addition, a breach of director’s duties may impact on whether your Tier 1 Entrepreneur Visa will be extended and/or whether your application for settlement will be approved.
However, there is no need to lose too much sleep over this rather dire warning; the fact is that director’s duties mainly encompass actions that a responsible company director would take in the normal course of his or her decision-making process.
The Seven Duties of a Company Director
The Companies Act ss171–177 set out the statutory duties owed by a director to their company.
Duty Number One
A director must act in accordance with the company's constitution (Articles of Association) and only exercise powers for the purposes for which they are conferred.
A company’s constitution or Articles of Association are the internal regulations which govern how the company is run. If for example, a clause in the Articles of Association states that a sole director must provide the company with a written record of a decision within seven days of the decision being made, he or she must do so, or they will have breached their duty. Similarly, if the items a director can claim as expenses are outlined in the Constitution, then he or she will be in breach if they claim for expenses not listed.
Duty Number Two
A director must act in a way that would be most likely to promote the success of the company for the benefit of its members.
To comply with this duty, the director must have regard to the following factors when taking actions:
- the long-term consequences of any decisions
- the interests of company employees
- relationships with suppliers and customers
- the impact on the environment and wider community
- the goal of the company maintaining its reputation for good business conduct
- the need to act fairly between members
With regards to this duty the legislation is simply codifying actions that responsible directors and board members should take when making decisions. In today’s business world, where complaints about the conduct of an organisation can be spread around the globe in minutes thanks to social media, it would be a brave company director indeed who made a decision that blatantly disregarded the rights of employees or adversely affected the environment.
Duty Number Three
A director must exercise independent judgement.
A director must avoid being submissive when faced with a dominant co-director and must not act with the interests of an individual shareholder, or a group of shareholders in mind. Directors are also restricted from delegating their powers in such a way as they cannot be taken back.
Duty Number Four
A director must exercise reasonable care, skill and diligence.
To comply with this duty a director must:
a) have the knowledge, skill and experience a reasonable person would expect of someone doing his or her job; and
b) perform his or her duties according to the knowledge, skill and experience they actually have.
The first limb of this test is objective and sets out the minimum standard for a director, based on their particular role and responsibilities. The second limb of this test is subjective and considers a director’s specialist knowledge, skill, and experience; for example, if one of the directors of a company is a qualified accountant, they will be expected to exercise the skill, care and diligence that would be taken by a reasonably diligent person with:
a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions that the particular director carries out in relation to the company, and
b) the general knowledge, skill and experience that the particular director actually has as a qualified accountant
Duty Number Five
A director must avoid conflicts of interest.
This duty involves avoiding conflicts of interest which apply to the exploitation of any property, information or opportunity. It is irrelevant for the purpose of this duty whether or not the company could actually take advantage of the property, information or opportunity.
If a company enters into a contract then a director must disclose a conflict of interest before the contract is signed, or else risk being in breach of his or her director’s duties.
Duty Number Six
A director must not accept benefits from third parties
We all know that accepting a bribe is wrong, but what about an invitation from a supplier to a private box at Twickenham for an international rugby game? Does it matter if this offer is made at the same time an important contract is up for negotiation?
Well, yes it does. The Companies Act says that a director must not accept a benefit from a third party that was offered because of the director’s position or because of anything they may do or not do as a director.
If a large contract is up for tender, the director who will make the decision should decline any offers of hospitality or presents. The director’s receipt of the benefit and the motive for which the benefit was offered are key to whether this duty has been breached. It makes no difference whether the actions of the director caused the company harm or not.
Duty Number Seven
A director must declare any interest in a proposed transaction or arrangement
A director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company has a duty to declare the nature and extent of that interest to the other directors before the company enters into the transaction or arrangement.
The company’s Articles of Association need to be checked. They may stipulate that the interested director cannot vote on the matter, or even that shareholder approval is required.
In some situations, such as where the interest cannot reasonably be expected to give rise to any conflict, a declaration from the director will not be required.
Consequences of a Breach of Director’s Duties
A director owes their general duties to the company (except in limited cases). It follows, therefore, that only the company can enforce them.
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
As a consequence of a breach of duty, the director may be forced to pay compensation to the company or restore the company’s property. The company also has the power to invoke an injunction on the director to prevent him or her carrying out the breach.
Shareholders can apply to the court to bring an action against a director for breach of director’s duties, but this must be done in the name of the company. Any sum of money recovered from the claim would revert to the company (and it will be the board’s decision whether to pass the benefit on to shareholders by way of dividend).
To avoid becoming personally liable for a breach, it is imperative that directors are aware of their duties under the Companies Act 2006 and how they apply to everyday business transactions. An Immigration solicitor in London can provide you with the best advice on ensuring you remain compliant whilst acting as a director on a Tier 1 Entrepreneur Visa.
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