Company directors often ask us about their legal duties, so we have compiled this guide outlining some key considerations. Although this is not an exhaustive list of directors’ duties, it offers a useful reminder of the main points that directors may wish to consider.
The duties of directors arise under:
statute (notably sections 171 to 177 of the Companies Act 2006) (“CA 2006”); and
common law (meaning court decisions in actual cases).
The duties set out in this guide are not exhaustive.
Act within powers: you must act in accordance with the company’s constitution and only exercise powers for the purposes for which they were given. If used for a different purpose, you will exceed your authority and be liable for breach of duty, irrespective of whether you believed your conduct would promote the success of the company. A company’s constitution for these purposes includes the Articles of Association, special resolutions and any shareholders’ agreements.
Promote the success of the company: you must act in the way you believe, in good faith, to be the most likely to promote the success of the company for the benefit of its shareholders as a whole. In doing so, you must have regard (among other matters) to six specified factors:
the likely consequences of any decision in the long term
the interests of the company’s employees
relationships with the company’s suppliers, customers and other trading partners
the impact of the company’s operations on the community and the environment
the maintenance of the company’s reputation for high standards of business conduct, and
the need to act fairly as between the members of the company.
The list of factors is not exhaustive but is helpful as it highlights areas of importance.
Exercise independent judgment: you must exercise independent judgment and make your own decisions. This duty will not be breached by a director acting in accordance with the company’s constitution or in accordance with an agreement already entered into by the company that restricts the future exercise of the directors’ discretion.
Exercise reasonable care, skill and diligence: you must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both:
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (the “objective” test)
the general knowledge, skill and experience that the director actually has (the “subjective” test).
The expected standard is therefore measured against both an objective and subjective test, i.e. where a director has specialist knowledge, the higher subjective standard must be met. In applying the test, regard must also be paid to the functions of the particular director, including his specific responsibilities and the circumstances of the company.
Avoid conflicts of interest: you must avoid situations in which you have, or can have, a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. That applies, in particular, to the exploitation of property, information or opportunity, and it is immaterial whether or not the company could take advantage of the property, information or opportunity.
This will not be infringed:
if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or
if the situation has been pre-authorised – such authorisation can be given in the Articles of Association, by specific shareholder resolution or by the other independent directors who are not conflicted.
The duty to avoid conflicts of interest will continue to apply after a person ceases to be a director as regards the exploitation of any property, information or opportunity of which he became aware when he was a director.
Not accept benefits from third parties: you must not accept any benefit (including a bribe) from a third party which is given because you are a director or because you do (or do not do) anything as a director. The duty will not be infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.
Declare an interest in proposed transactions or arrangements with the company: you must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. The declaration must be made before the company enters into the transaction or arrangement.
No declaration will be required if:
you are a sole director, or
your interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or
if the other directors are already aware of it (and such directors are treated as aware of anything of which they ‘ought reasonably to be aware’), or
you are not aware of your interest or where you are not aware of the transaction or arrangement.
A director owes his duties to the company – it is therefore the company that would take enforcement action against the director if there has been a breach of duty. Any decision to start proceedings is made by the board of directors (although in an insolvency this is likely to be the liquidator). In certain cases it is possible for a shareholder or a group of shareholders to bring a claim against a director for breach of duty on behalf of the company – this is known as a ‘derivative action’.
Where a company is in financial difficulties the directors should also take independent advice as soon as possible to avoid any potential personal liability under insolvency legislation. The risks in this area are very complex and therefore specific advice should be sought as soon as the risk of insolvency arises.
There are also many other duties and obligations imposed on directors under the CA 2006, common law and other statutes, such as duties to prepare and file company accounts, obligations regarding loans made by the company to the director and duties relating to health & safety and environmental legislation. These duties and obligations are beyond the scope of this guide.
If you’d like further help on this, please get in touch.
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