LAWLINK – Directing directors


Q:  My dad has been happily semi-retired for the last few years. He still has his hand in a few small ventures, but that is more as a social thing than anything else. One of his colleagues is trying to tempt him back to being a director of his company, not in any active capacity but just as a figurehead to shake hands and ‘to be there to be seen’. He is offering good money, expenses etc. Dad thinks that the company isn’t run well and that it may be on its last legs. He feels he is being brought in as a last ditch effort to try and turn things around. He is interested in it, as it seems like money for nothing, but I am worried that he will be drawn into doing a lot of extra work. What would you advise?

A: Although your dad is being invited into the company as a ‘paper’ director, he should be very careful.

As a director, he would have to act in good faith in the best interests of the company – not the shareholders of the company, but the company itself.

He has a duty to ensure that the company is not trading recklessly. Reckless trading would also include trading knowing or potentially knowing that same would cause a loss to creditors. This would be a breach of the Companies Act – and more importantly might potentially hold your dad personally liable to losses thereby occasioned.

If your dad does go into a company as a paper director and if the company is to be subsequently liquidated, naturally that will show up on any CRO or credit search that is made against your dad. Of course, if the company is wound up as it has served its purpose, and all debts and liabilities have been dealt with etc., this could be easily explained away.

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However, if the company is being liquidated as it is insolvent, the Director of Corporate Enforcement (DCE) can seek to have your dad restricted as a director – which means he could only act in limited circumstances. The onus would be on him to prove that he acted honestly in relation to his directorship of the company.

The DCE could also seek to have your dad disqualified as a director if there was a breach of the Companies Act. This is obviously a serious matter.

Your dad should ensure that he looks carefully into the company before accepting a directorship. If he is satisfied to proceed, he should be aware that he has certain duties – regardless of assurances of other directors or owners. If he is not happy to progress matters, then he is obviously under no obligation whatsoever to take the position.