Here is a short overview of the general duties of directors.
Who is a Director?
You will normally know if you are a director as you will have formally accepted the position. However, if you exercise sufficient influence over a company or act as if you are a director, you may be treated as a director for certain purposes even if not formally appointed.
Should you be a Director?
Certain people are prohibited from acting as a director, including person under 16 years of age, bankrupts, disqualified persons and a person acting as auditor of the company. While there is no mandatory qualification required to be a director, a director is required to perform the duties outlined below and so must be capable of doing so.
What are your general duties as a Director?
The Companies Act 2006 sets out the seven general statutory duties of a director. These are listed below with some additional commentary.
- To act within powers (regulation 16). This requires a director to comply with the company’s constitution and decisions made under the constitution and to exercise the powers only for the reasons for which they were given.
- To act in a way the director considers (in good faith) is most likely to promote the success of the company for the benefit of its members as a whole (or, if relevant, other purposes specified in the constitution). In performing this duty, a director must have regard to all relevant matters, but the following are specifically identified in legislation:
- The likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standard business conduct; and the need to act fairly as between members of the company.
3. To exercise independent judgment, that is, not to subordinate the director’s power to the will of others. This does not prevent directors from relying on advice, so long as they exercise their own judgment on whether or not to follow it.
4. To exercise reasonable care, skill and diligence. This requires a director to be diligent, careful and well informed about the company’s affairs. If a director has particular knowledge, skill or experience relevant to his function (for instance, is a qualified accountant and acting as a finance director), expectations regarding what is ‘reasonable’ will be judged accordingly.
5. To avoid conflicts (or possible conflicts) between the interests of the director and those of the company. The prohibition will not apply if the company consents (and consent meets the necessary formal requirements).
6. Not to accept benefits from third parties (ie a person other than the company) by reason of being a director or doing anything as director. The company may authorise acceptance (subject to its constitution), for instance to enable a director to benefit from reasonable corporate hospitality; and
7. To declare any interest in a proposed transaction or arrangement. The declaration must be made before the transaction is entered into and the prohibition applies to indirect interests as well as direct interests.
In addition to these duties, a Director has duties:
- To consider or act in the interests of creditors (particularly in times of threatened insolvency); and
- to maintain confidentiality of the company’s affairs (a duty which to a large extent follows from the general duties outlined above).
Duties of the company
Of course the company itself has numerous legal duties. These include duties under the Companies Act itself, such as to maintain full and accurate accounting records and to make relevant filings at Companies House (included the annual accounts). It also has to comply with all other laws and regulations applicable to it (such as tax and employment laws). As the company acts through the board of directors, the directors are responsible for ensuring compliance by the company.
In certain cases, directors are made specifically liable for breach, for instance, in the case of accounting records, every officer of the company is liable to a fine, imprisonment or both.
Directors as employees
A director may also be an employee of the company (and is then typically referred to as an ‘executive director’). The general duties of directors outlined above apply equally to executive directors, but an executive director will also be bound by the terms of his employment contract.
What are the consequences of breach?
- The general duties outlined above are owed by the director to the company and only the company (or in limited circumstances, the shareholders) will be able to enforce them as such.
- Remedies available for breach of these duties include injunctions (to prevent further breach), setting aside an affected transaction (eg entered into in breach of requirements on conflict), restoration of company property held by the director and damages.
- A breach may also be grounds for termination of an executive director’s service contract.
This note only covers the general duties of directors under the Companies Act 2006 and it is beyond the scope of this note to identify all circumstances where a director may be personally liable for acting as a director. By way of illustration only:
- as noted above, under the Companies Act, a director may be liable for failure by the company to make required filings at Companies House;
- under the Insolvency Act 1986, a director may be personally liable for wrongful or fraudulent trading in the context of insolvency of the company; and
- the board and each director has responsibilities under the Health and Safety at Work Act 1974, breach of which may result in criminal sanctions on a director.
In certain circumstances, a director may be disqualified from being a director under the Company Directors Disqualification Act 1986.
Can a Director be relieved of liability?
A director of a company cannot be exempted from liability in connection with any negligence, default, breach of duty or breach of trust in relation to the company. A director cannot be indemnified by the company against those liabilities unless the indemnity meets specific statutory criteria. The prohibition does not prevent a company from providing ‘Directors and Officers’ (D&O) insurance for directors, but this does not exonerate them from their obligations.
A company may generally ratify acts carried out by a director in breach of duty. Appropriate procedures need to be followed for ratification and not all acts can be ratified (for instance, fraudulent acts of the director). A court may relieve a director if it considers that the director has acted both honestly and reasonably and that he ought fairly to be excused.
Points to note
This is a general overview of general duties of directors of limited liability companies under the Companies Act 2006.
This is not to be relied upon as advice in relation to any particular directorship. Interpretation of the law often depends upon the particular circumstances and if directors are in difficulty over interpretation of their duties they should seek independent legal or other professional advice.