Who is in charge if a GP practice is a company?
Last month, Justin Cumberlege of law firm Cripps explained why forming a company should be a good idea for growing GP practices. In this issue he looks at the role of the director.
In a GP partnership everyone knows who is ultimately in charge – the partners. They own the business, they take all the business decisions and they take the profits (their drawings which increase or decrease depending on the amount of money the business is making).
A company is a separate legal entity in its own right. The shareholders (generally but not exclusively the GPs) own the company, and receive the profits as dividends, but the directors may not be the same people (this can be the GPs, but it may also be, for example, a business manager). They are appointed by the shareholders and run the company day to day – so who is in charge?
The Companies Act 2006 makes it quite clear that responsibility lies with the directors. The duties of the director are set out in sections 171-176 and to summarise, they are:
- Duty to act within powers – a director must act within the powers of the company’s constitution and for the purpose for which the powers have been given to the directors.
- Duty to promote the success of the company – directors must consider the consequences of a decision to the GP practice in the long term, take into account the interests of the employees, the impact of its operations on the community and the environment, its reputation, and relationship with patients and suppliers, and to treat the members (shareholders) fairly.
- Directors must exercise independent judgement, declare their interests in any transaction of the company, avoid conflicts of interest (although there are practical ways of dealing with conflicts), and not accept benefits from third parties relating to the directorship.
So it is wrong to think that the primary duty of the directors is to maximise profits for shareholders.
The constitution (normally the articles of association and sometimes a shareholders’ agreement) can state what the objects of the GP practice are. While a trading company may not specify any particular objects, so it has maximum flexibility, many primary care companies do have stated objects. For example: “To promote the provision of general medical practice in [name of place].” The problem with being too restrictive is that it may cut out opportunities in the future, and the directors would be acting outside their powers if they did enter into a contract which was to provide a service which (in this example) covered another place.
Therefore it is important to read the articles of association, and any other constitutional documents to ensure you understand them well and are not at risk of acting outside the powers given to you. If the articles are too restrictive, normally they can be changed with the agreement of 75 per cent of the shareholders.
Ensuring the company’s constitution accurately reflects what you want to achieve is important so everyone is clear what the purpose of the company is and what restrictions the directors have.
This article first appeared in Practice Management in May 2018.