Directors’ Duties Company Law
Company directors are responsible for the management of their companies. For years, the duties that directors owed to their companies evolved through case law. The Companies Act 2006 (the “Act”) changed matters significantly and introduced a statement of directors’ duties. This statement of duties replaces many of the existing duties set out in case law. Below is a note of the main statutory directors’ duties.
The directors’ duties set out in the 2006 Act are:
1. The duty to act within powers
Firstly a director must act in accordance with the company’s ‘constitution’. This means that as a director you must act in accordance with:
- Your company’s articles of association.
- Your company’s memorandum of association.
- All decisions taken in accordance with the articles of association.
- Any other decisions taken by the shareholders or a class of shareholders when such decisions are treated by law as being equivalent to decisions of the company.
- Any resolutions and agreements affecting your company’s constitution.
Secondly you must exercise your powers for the purposes for which they were conferred. If a power has been given to you for one purpose under the 2006 Companies Act, you must not exercise such power for a different purpose even if you exercise the power in good faith or think it would be in the best interests of your company. This power should not be used, for example, to protect your position as a director or to make matters difficult for a particular shareholder.
2. The duty to promote the success of the company
In order to comply with this duty, you must act in the way that you consider, in good faith, would be most likely to promote the success of your company for the benefit of all of the shareholders. In doing this, you must think about the following matters, in particular:
- The likely consequences of your decision in the long term.
- The interests of your company’s employees.
- The need to foster your company’s business relationships with suppliers, customers and others.
- The impact of your company’s operations on your community and the environment.
- The desirability of your company maintaining a reputation for high standards of business conduct.
- The need to act fairly as between the shareholders.
Note if your company is insolvent or insolvency is threatened, the duties set out above may be changed so that the most pressing duty is for you to think about the interests of your company’s creditors.
3. The duty to exercise independent judgment
The 2006 Companies Act provides that you must exercise independent judgment. That is, you must not restrict yourself from exercising independent judgment on your company’s behalf. As a director, you cannot agree with any shareholder that appoints you to vote at board meetings in any particular way (even if voting in that way would not otherwise be a breach of your duties as a director to the company). This duty will not prevent you from relying on advice, as long as you exercise your own judgment in deciding whether or not to follow the advice.
4. The duty to exercise reasonable care, skill and diligence
You must be sufficiently qualified or experienced to be able to fulfil the functions that might reasonably be expected to be carried out by you as a director, and if you are particularly qualified or experienced then you would be expected to exercise a high level of skill and expertise. The first part of the above test is objective and the second part is subjective. You are also required to exercise your directors’ duties diligently, keep yourself informed about the company’s affairs and, with your co-directors, to supervise and control them. Overall, this responsibility cannot be delegated to any party. However, this does not prevent you from relying on the experience and expertise of your colleagues or, generally, from sensibly delegating or allocating tasks to others, provided that you do not attempt to absolve yourself entirely of responsibility.
5. The duty to 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, your company’s interests. This applies, in particular, to the exploitation of property, information or opportunity, and whether or not the company could take advantage of such property, information or opportunity. This does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company, or that is covered by sections other sections of the 2006 Act (see (7) below (Duty to declare interest in proposed transaction or arrangement with the company)).
6. The duty not to accept benefits from third parties
You must not accept any benefit (including a bribe) from a third party which is conferred because of your being a director or your doing or not doing anything as a director. However, the duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. The duty to declare interest in a proposed transaction or arrangement with the company
If you are in any way, directly or indirectly, interested in a proposed transaction or arrangement with your company then you must declare the nature and extent of that interest to the other directors. If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made. Any declaration required by this section must be made before the company enters into the transaction or arrangement. You need not declare an interest (a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest; (b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or (c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered (i) by a meeting of the directors, or (ii) by a committee of the directors appointed for the purpose under the company’s constitution.
You should also be aware of the following additional duties:
- Your company is entitled to set out more onerous duties in its articles of association but your articles cannot dilute such duties except to the extent expressly allowed by the 2006 Act;
- The duties are owed by you to your company. Only your company will be able to enforce them. However, in certain circumstances, the shareholders in your company may be able to bring a ‘derivative’ action. For example, the shareholders might claim (on the company’s behalf) that your company has breached one of its duties;
- The duties set out in the 2006 Act to avoid conflicts of interests and the duties not to accept benefits from third parties apply even to former directors of your company.
- It is your responsibility as a director to ensure that full annual accounts are produced each year and sent to all shareholders within the required time. If it is proposed that the company takes advantage of certain exemptions in relation to the preparation of the annual accounts, you will also need to be satisfied that the company is a private company that meets the qualifying criteria for such exemptions.
- You also have a duty to deliver the annual accounts and reports to Companies House. Failure to submit the accounts within the required period carries an automatic civil penalty payable by the company in default, which increases according to how late the accounts have been filed.
- You are responsible for ensuring that the company keeps an up-to-date register of all the directors of the company, detailing their name, address, nationality, business occupation (if any), other directorships and date of birth.
- In an insolvency situation, the interests of the creditors (as a whole) will become the most significant element in determining how your duty to promote the success of the company should be discharged. From a practical point of view, it is crucial that full board meetings are called regularly if the company is in financial difficulties and that the commercial decisions of the directors are reported in full in the company’s minutes
For further information please contact our corporate and commercial team on 01463 239393.
This information in this publication is based on our current understanding of the Law. It has been produced for information purposes only. Professional advice should always be sought before taking any action. Macleod and MacCallum cannot take any responsibility for loss incurred for acting or failing to act on the basis of anything contained in this publication.