Framework Agreement Ferguson Marine Group Companies and the Scottish Government, 2024

Appendix 1

Directors Duties

1. Introduction

All directors, whether of parent or subsidiary companies, and whether executive or non-executive directors, have obligations and duties imposed on them by statute and general law. This note summarises some of the main duties of directors of a company arising by law in the context of the Ferguson Marine group of companies. It should not be regarded as an exhaustive list of all duties and obligations that apply to directors of a company.

2. General duties

A company is a legal entity which is distinct from its members (i.e. shareholders). While the company's members have rights in the company, responsibilities to the company are generally owed by those entrusted with its management, namely the directors.

The Companies Act 2006 ("CA 2006") codified the key directors' duties with a view to reflecting in statute the position under the common law and equitable principles, but with some significant changes. The statutory duties replaced the former unwritten duties, but common law rules and equitable principles continue to be used in interpreting and applying the statutory duties.

It is important to recognise that the codified duties do not cover all of the duties a director may owe to a company.

Directors generally owe these duties solely to the company, and only the company is able to enforce them. However, the members may in certain circumstances be able to bring what is called "a derivative action", albeit essentially on the company's behalf.

Under CA 2006, directors owe the following duties to the company:

2.1 Act within powers

Directors must act in accordance with the company's constitution (articles of association) and only exercise their powers for proper purposes.

2.2 Promote the success of the company

Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

"Success" for a commercial company would usually mean "long-term increase in value". However, it will be open to a company to adopt a different definition of "success". (In the context of the Ferguson Marine group of companies, the Scottish Government has set out separately what "success" should look like for the group.)

Directors must have regard to the following matters (amongst others) when discharging this duty:

• the likely consequences of any decision in the long term,
• the interests of the company's employees,
• the need to foster the company's business relationships with suppliers, customers and others,
• the impact of the company's operations on the community and the environment,
• the desirability of the company maintaining a reputation for high standards of business conduct, and
• the need to act fairly as between members of the company.

A director is only obliged to have regard to the factors listed above and is not required actively to promote the interests of the environment, the community and so forth. However, directors should ensure that they are able, if necessary, to demonstrate that they had regard to the above matters (together with any other relevant matters) when making decisions affecting the company, whether at board or committee meetings, or acting alone as an executive director making decisions on behalf of the company.

2.3 Exercise independent judgement

Directors must exercise independent judgement. This duty does not preclude the taking of professional advice, nor will it prevent a director from acting in line with the company's constitution or in accordance with the terms of any agreement entered into by the company.

2.4 Exercise reasonable care, skill and diligence

Directors must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both (i) the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (the objective test), and (ii) the general knowledge, skill and experience that the director actually has (the subjective test).

The practical consequences of the objective and subjective limbs of this duty include the following:

• a member of the audit committee would be expected to exercise greater diligence in relation to the audited accounts;
• the CEO and finance director of a company are likely to be held to a higher standard than a non-executive director; and
• a director who is a qualified accountant would be expected, where this superior knowledge and skill is applicable, to show a higher standard of skill, care and diligence than a director without such qualifications.

2.5 Avoid unauthorised conflicts of interest.

Directors must avoid situations in which they have, or may have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This duty applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity), but does not apply to conflicts of interest arising in relation to transactions or arrangements with the company. This duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, nor if the matter has been authorised by the board of directors (although in the case of a public company, the constitution will need to allow the directors to do so).

2.6 Do not accept benefits from third parties.

Directors must not accept any benefit from a third party conferred by reason of their being a director or their doing, or not doing, anything as director. This duty is not infringed if the acceptance of the benefit could not reasonably be regarded as likely to give rise to a conflict of interest. Directors will be liable to pay to the company any benefit which they receive in breach of this duty. The value of the benefit is immaterial in assessing whether this duty has been breached, and the board of directors may not authorise the acceptance of any benefit in breach of this duty.

2.7 Declare interests in proposed transactions or arrangements.

If a director has any direct or indirect interest in any proposed transaction or arrangement with the company, they must declare both the nature and the extent of that interest to the other directors. The relevant director must do so before the company enters into the transaction or arrangement.

To the extent that an interest is not so disclosed in advance of a transaction, directors have a separate duty to declare (as soon as is reasonably practicable) any direct or indirect interest in a transaction or arrangement that has already been entered into by the company.

Directors need not, however, declare any interests which cannot reasonably be regarded as likely to give rise to a conflict of interest.

3. Additional fair dealing provisions in CA 2006

3.1 Transactions with directors

Companies are not, in most circumstances, permitted to enter into arrangements under which a director (of the company or any holding company) or a connected person is to acquire from, or to dispose to, the company or any of its subsidiaries, a non-cash asset worth in excess of

£100,000 or 10 per cent of the company's net assets (subject to, in the latter case, a de minimis £5,000 limit) unless the arrangement is first approved at a general meeting or if the arrangement is made conditional upon obtaining such approval. If it is not, the contract can be set aside and the director who was party to the arrangement and any director who authorised it are liable to account for any gain made as a result of the arrangement and to indemnify the company against any resulting loss.

Companies may only grant loans or provide security or other financial accommodation to directors (of the company or any holding company) and their connected persons so long as approval has been obtained from members at a general meeting.

3.2 Prohibition on payments to directors for loss of office

A company must obtain the approval of members at a general meeting before making a payment in cash or non-cash benefits to a director or past director (of the company or any holding company) or connected person as compensation for loss of any office (including as a director) or employment with the company or any of its subsidiary undertakings, and before making any payment in connection with his retirement. However, approval is not required for a payment made in good faith in discharge of an existing legal obligation, such as under an employment contract which has no connection with the event giving rise to the payment for loss of office1.

4. Liability for annual reports

Under section 463 of CA 2006, directors are liable to compensate the company for any loss suffered as a result of false or misleading statements or omissions of required information from the annual directors' report, directors' remuneration report and any summary financial statement so far as it is derived from such reports. However, liability only arises if the relevant director (i) knows or is reckless as to whether the statement is untrue or misleading, or (ii) knows that the omission is a dishonest concealment of a material fact. A director will not be liable to any person other than the company who may rely upon information in such reports2. However, the company may be liable to such persons.

5. Insolvency

1 See sections 215, 217 and 220 of CA 2006.

2 At least not under UK law. It cannot be guaranteed that courts in other jurisdictions would apply section 463(4) of CA 2006.

A director may in certain circumstances become liable to contribute to any deficiency suffered by the creditors of the company if the company becomes insolvent.

5.1 Fraudulent purpose

A director may be held liable to contribute to the company's assets on its winding up if it is shown that he has knowingly carried on the company's business with the intention of defrauding creditors of the company or of any other person, or for any fraudulent purpose. Such conduct also constitutes a criminal offence.

5.2 Wrongful trading

A director of the company may be personally liable to contribute to its assets if at any time before the company went into insolvent liquidation.

(i) the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and (ii) he then failed to take "every step" to minimise the potential loss to the creditors of the company. The standard required as to what the director ought to know, the conclusions he ought to reach and steps he ought to take is that which would be known, reached or taken by a reasonable diligent person with the general knowledge, skill and expertise that may reasonably be expected of a person carrying out the same functions as those of the directors in relation to the company and with the general knowledge, skill and experience that the director has. Thus, there is an objective and subjective test.

(iii) Transactions at an undervalue and preferences

A liquidator (or administrator) can obtain a court order setting aside certain transactions made when the company was insolvent, or which caused the insolvency, and which were made at an undervalue. A transaction is at an undervalue if the company receives no consideration for it, or significantly less consideration than it provides itself. The liquidator (or administrator) may also set aside transactions which "prefer" any creditor of the company.

6. Disqualification

Apart from personal liability, where a director engages in fraudulent or wrongful trading or has been found guilty of other misconduct in connection with a company and is held to be unfit by the court, he may under the Company Directors Disqualification Act 1986 be disqualified by court order for up to fifteen years from acting as a director or from having any involvement in the promotion, formation or management of a company.

7. Competition laws

Under the Enterprise Act 2002 criminal penalties may be imposed upon individuals who dishonestly engage in what are considered to be the most serious types of cartels such as horizontal price fixing, limiting supply or production, market shares or bid-rigging. Prosecution by the OFT and the Serious Fraud Office could lead to five years' imprisonment and an unlimited fine on conviction.

8. Health and safety

The general obligations on a director which are discussed above (in particular the duty under CA 2006 to promote the success of the company) extend to health, safety and environmental ("HSE") matters.

HSE matters have, however, been singled out for special attention in the context of directors' duties and potential liabilities. This is principally because most HSE statutes include provisions for personal liability of directors where an HSE incident is due to their consent, connivance or neglect. The provisions result in a number of prosecutions of individual directors each year.

In addition to criminal penalties, a director may also be disqualified if found criminally liable under HSE legislation (see paragraph 5 above).

A director therefore cannot safely assume that HSE matters are the responsibility of a nominated head of HSE within the company, even if that person is a senior employee. Each director should satisfy itself that a proper HSE management system is in place which reports to the board and that sufficient resources are provided for HSE matters to be dealt with in accordance with legal obligations and company HSE policy.

9. Corporate manslaughter

The Corporate Manslaughter and Corporate Homicide Act 2007 created an offence of corporate manslaughter which replaced the previous common law offence for companies. A company commits corporate manslaughter if a person's death is caused by the way in which the company manages or organises its activities, amounting to a gross breach of a relevant duty of care owed to the deceased. The way in which senior management, including the directors, managed or organised the company's activities must comprise a substantial element of the breach.

The Act does not create individual liability for directors, who remain subject to the manslaughter laws outside of the Act.