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Directors’ Duties

Posted by Sean Jackson on 13th April 2016

Whether you are a company director and have been most of your working life, or whether you are new to directorship and have just set up your own company, the duties owed to the company are the same. 

All directors owe a “fiduciary duty” to the company that they are a director of. This means, effectively, that they are in a position of trust and must act in the interests of the company. The general statutory duties owed by a director are set out in the Companies Act 2006.

Even if a person is not formally appointed as director but acts as if they were – such as a shadow director – these duties (amongst others) may in certain circumstances also apply to them.

This briefing note summarises the duties that a director must abide by.

 

Duty to act within powers – only do what you’re allowed to do

A director must act within the powers granted in accordance with the company’s constitution or articles of association (the documents that govern how a company is to operate). A director must also only exercise powers granted to him for the purposes for which they are given. This means that just because the articles of association allow a director to do something, does not mean that they should!

If you have not already done so, consider reviewing what the articles of association say and what powers they confer upon directors to have a better understanding of what you can and cannot do.

 

Duty to promote the success of the company – put the success of the company before the success of the directors

A director must act in a way in which they think would most likely promote the success of the company for the benefit of its members or shareholders as a whole. This means that a director must consider, amongst other things:

  • The consequences of any decisions in the long term;
  • The interests of the company’s employees;
  • The need to maintain and develop the company’s business relationships;
  • The impact the company may have on the community or the environment
  • The reputation of the company; and
  • The need to act fairly as between members or shareholders of the company.

In situations where a company is insolvent, or appears to be heading into insolvency, a director must also consider the interests of any creditors of the company.

A director in a private or public company limited by shares would have to ensure that they act in the best interests of the shareholders with an aim to increase the company’s value and success.

This duty is rather wide reaching. A director must ensure that they do not breach any other duties in an attempt to promote the success of the company. A director cannot, for example, act beyond their powers in order to promote the success of the company.

 

Duty to exercise independent judgement – be independent

A director must exercise independent judgement. A director can still seek and rely on the advice of others, but ultimately the decisions that a director makes must be their own.

A director can of course rely on advice given by their professional advisors, such as from lawyers or accountants, when the situation permits provided that they exercise independent judgement when deciding whether to follow the advice or not.

This duty is to prevent situations where a shadow director (someone who acts like a director but is not registered as one at Companies House) is able to run a company by influencing the actual directors.

 

Duty to exercise reasonable care, skill and diligence

A director must exercise reasonable care, skill and diligence that would be expected from a director; and also the same care, skill and diligence that would be expected of someone with that particular director’s knowledge and experience.

This means that the standard required not only looks at the director themselves (having the knowledge, experience and expertise that they have), but also looks at the standard we should expect from a company director. This means that even if a director is inexperienced, the court will hold them to a higher standard of that to be reasonably expected of a director.

In addition, if a director has a particular expertise in a certain area, the standard takes this into consideration and would again hold the director to a higher standard than that of a “reasonable” director without the particular expertise.

 

Duty to avoid conflicts of interest

A director must avoid situations where they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company.

A conflict does not arise in relation to a transaction or arrangement between the company and the director, and the duty is not infringed, provided that the matter is authorised by the directors. The company’s articles of association may govern this point.

This duty continues after a director resigns in respect of any property, information or opportunity of which they became aware at a time when they were a director. 

 

Duty not to accept benefits from third parties

A director must not accept a benefit from a third party given to them by a reason of them being a director or because of anything they do or do not do as a director.

A third party means a person other than the company, an associated body corporate (a company in the same group of companies) or a person acting on behalf of the company or an associated body corporate.

This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

This duty, like the duty to avoid conflict of interests, continues after a director resigns in regards to things done or not done by them before they ceased to be a director.

 

Duty to declare interest in proposed transaction or arrangement

 If a director is in any way directly or indirectly interested in a proposed transaction or arrangement with the company, they must declare their interests to their fellow directors.

 It is often best, in situations like this, to declare the interest and seek to pass a resolution at a board meeting acknowledging the interest and authorising the transaction.

This duty is similar to the duty to avoid conflicts of interests however it refers specifically to transactional conflicts of interest.

 

What if I breach one of the duties?

 A director’s duties are owed to the company. If there is a breach of one (or more) of those duties, the company is entitled to take action against the director individually. More often than not, a decision would be made by the board whether to take action against a director who has breached their duties. If the company is in a form of insolvency then the decision may be made by the liquidator or administrator.

 Shareholders also have the power to bring a claim on behalf of the company against a director for a breach of duty, which is known as a derivative action.

 The remedies available include injunctions, damages and compensation. The company could also, in cases of conflicts of interest, seek to set aside a transaction in which a breach occurred. Breach of duty could also be grounds to terminate a director’s appointment, or for them to be disqualified from acting as a director of any company – not just the company in respect of which their duties were breached.

 

How can we help?

 This is not an exhaustive list of the duties that a director owes to a company, either under the Companies Act 2006 or other legislation (such as that relating to insolvency, health and safety, the environment, amongst others) and details only the general principal duties of care owed by a director to a company.

Our team is on hand to advise you on the duties owed to a company by its directors and to answer any other questions that you may have. Please therefore feel free to get in touch with us on 01642 610300 and ask for a member of the corporate department.


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