Orr Litchfield

Solicitors and Business Lawyers

Directors' Service Agreements

Company directors play a key role in starting, managing and developing the companies of which they are board members. In doing so, they are required to ensure that the company complies with a variety of laws applicable to the company and that they themselves comply with laws applicable to their roles as directors.

In view of their importance to a company, it is critical for all those involved in any company to be able to identify its directors and understand their roles and responsibilities.

What is a director?

The Companies Act 2006 defines a "Director" as including “any person occupying the position of director, by whatever name called”. There are several types of director including executive directors, non-executive directors, de jure directors, de facto directors and shadow directors.

What law applies to directors?

Company directors are directly affected by several areas of law, in particular, company law, insolvency law and (depending on the nature of their role) employment law.

The Companies Act 2006 is the primary piece of legislation affecting directors and their involvement in companies. Amongst many other matters, it sets out 7 general duties of directors to the Company. The Insolvency Act 1986 is also relevant to directors, particularly where a company is in a difficult financial position.

Directors who are employees or workers may benefit from various employment laws. Those who are simply office-holders may also be protected by some employment laws.

All companies are required to have a memorandum and articles of association. The directors will have to ensure that they and others involved in the company comply with these constitutional documents.

Where directors are also shareholders, as is often the case in start-ups or SMEs, they will also have to ensure that they comply with any shareholders’ agreement and manage any potential conflict of interest.

What is a director’s service agreement?

There are 2 main types of director’s service agreements, those for executive directors and those for non-executive directors.

An executive director is a full or part-time employee of the company. Accordingly, an executive director’s service agreement is essentially a contract of employment, which typically contains terms suitable for the appointment of a senior employee who is also on the board of the company.

There is no statutory definition of a non-executive director, but such a director will usually devote part of his time to the affairs of the company as an independent adviser or supervisor. A non-executive director is not a full or part-time employee of the company or holder of an executive office.

Must every director have a written service agreement?

In short, the answer is no.

In general terms, as with an employment contract, there are no particular formalities that have to be observed for entering into a service agreement. In the case of an executive (employed) director, there is no legal requirement for the director to have a written service agreement and, accordingly, there is no strict requirement for a service agreement to be signed by either or both parties.

Should every director have a written service agreement?

In short, the answer is yes.

The main purpose of a service agreement is to regulate the relationship between the employer and the director, who are parties to the contract. It is usually in the interests of the parties to enter into a formal written contract as otherwise it may be difficult and time-consuming to establish the terms of the contract where this is required.

Directors are likely to have access to a broad range of valuable business information relating to the company including intellectual property, customer lists, reports, notes, memoranda and all other documentary records pertaining to the company or its business affairs, finances, suppliers, customers or contractual or other arrangements). The shareholders, stakeholders and other directors of the company will usually wish to ensure that the directors act in the interests of the company and do not abuse their position for their own advantage. Similarly, directors will wish to ensure that their employer complies with its responsibilities.

Where shareholders are seeking funding or looking to sell their company shares, an investor or share purchaser is likely to expect the company to have entered into a service agreement with each of the directors in order to protect their investment or purchase and as a sign of good management.

Section 1 statements for executive directors

Whilst there is no legal requirement for an employed director to have a written contract of employment, section 1 of the Employment Rights Act 1996 requires an employer to provide:

(a)    an employee with a written statement of the main terms of their employment contract, and

(b)   a worker with a written statement of the main terms of their contract.

As executive directors are employees, section 1 of the Employment Rights Act 1996 applies to them and, accordingly, they should be provided with a written statement of the main terms of their service agreement. For employees commencing employment on or after 6 April 2020, the majority of written particulars must be provided on or before the employee starts work.

Where there is no written service agreement between the parties, a section 1 statement may be persuasive evidence of the whole or part of what has been agreed between them. However, it does not necessarily constitute the service agreement or even form part of it. It will only do so if it can be shown that the parties intended it to do so.

The terms of any written service agreement will override the section 1 statement in the event of a conflict. However, employers should prepare their employment contracts to comply with the requirements of section 1 of ERA 1996, thereby avoiding the need to issue a separate section 1 statement. Accordingly, conflicts are rare.

Contact Orr Litchfield Solicitors to discuss your service agreements

If you would like more information about directors’ service agreements or would like to discuss a potential or existing director’s service agreement, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.