Being made a director of a company, either by way of founding the company or appointment, provides a wealth of opportunities to steer the organisation in the direction you want to go and the chance to reach some of your professional ambitions. For company directors, the Companies Act (CA) 2006 codifies the duties and responsibilities they must abide by.
In this article, we explain each duty so you understand the compliance requirements, mitigating the risk of unpleasant encounters with regulatory and/or enforcement bodies.
What’re the duties and responsibilities of a director?
The statutory duties of a company director are set out in sections 171 to 177 of the Companies Act 2006. These duties outline the legal obligations that directors must fulfil when carrying out their roles.
What are the statutory duties of a director?
- s. 171 - Duty to act within powers
- s. 172 - Duty to promote the success of the company
- s. 173 - Duty to exercise independent judgment
- s. 174 - Duty to exercise reasonable care, skill and diligence
- s. 175 - Duty to avoid conflicts of interest
- s. 176 - Duty not to accept benefits from third parties
- s. 177 - Duty to declare interest in proposed transaction or arrangement
1. Duty to act within powers
As a director, you must act in a way that aligns with the company's constitution, including the Articles of Association, resolutions, and agreements. Furthermore, you must abide by the equitable principle of ‘proper purpose’, meaning you must “only exercise powers for the purposes for which they are conferred”.
2. Duty to promote the success of the company
You may wonder why this duty has to be included in legislation - of course, you’ll be focused on promoting your company! However, section 172 requires you to act in good faith when exercising this duty. Therefore, when making any important decisions in your role as director, you must consider a range of factors, including:
- The long-term impact of your choices
- Company employees
- Relationships with suppliers and customers
- The community and environment
- Upholding your organisation’s reputation for integrity in its commercial conduct
3. Duty to exercise independent judgment
As a company director, you cannot delegate your decision-making powers. Furthermore, you need to protect yourself from the influence of others when it comes to making choices. You can seek advice on a particular matter but must always rely on your judgments to conclude.
4. Duty to exercise reasonable care, skill, and diligence
The duty to exercise reasonable care, skill, and diligence means that in your role as director, you must act the way a ‘reasonably diligent person’ in terms of the general knowledge, skill, and experience would reasonably be expected to act.
Furthermore, if you have specific professional skills or education, you’ll be held to a higher standard than a director who does not possess those skills. To ensure you can fulfil your responsibilities as a director, you should be confident that you possess the necessary experience for such a position in your organisation’s market sector.
5. Duties relating to conflicts of interest
Not acting in a way that could result in a conflict of interest is one of the most challenging codified duties. Specifically, you must be careful not to become personally involved in a situation in which the company can or should take advantage of property, information, or opportunity. Because the test for whether a conflict of interest exists is objective, you can breach this duty even if you were unaware a conflict existed.
Examples of conflicts of interest include situations where the director has relationships of a business or personal nature with people or things affected by the company’s pursuits. Another example is where you take advantage, on a personal basis, of a property, information or opportunity which belongs to the company or you heard about through your position as a director.
6. Duty not to accept benefits from third parties
As a company director, you must be extremely careful when accepting gifts or benefits, so it can result in a conflict of interest.
7. Duty to declare interest in proposed transaction or arrangement
You must fully disclose any interest in a proposed commercial transaction or arrangement to the other directors. You don’t need to be a party to the transaction or arrangement - for example, if your spouse or partner agrees with one of your competitors, you must disclose the deal to your colleagues.
To whom are the directors' duties owed?
Under the Companies Act, a director owes fiduciary duties to the company in which they hold office and mustn’t act in a manner which breaches those duties.
Who can bring a claim for breach of directors’ duties?
The Companies Act also provides for a "derivative action" that allows shareholders and others to sue directors on behalf of the company.
Do directors owe duties to shareholders?
The traditional position in English company law is that directors owe duties, including fiduciary duties, to the company itself rather than the shareholders. However, case law provides that under certain factual circumstances, a director may owe fiduciary duties to company shareholders, but only if the relationship between the director and shareholders goes beyond normal.
An example may be if the director holds themselves out as an agent for the shareholders or make deliberate misrepresentations to shareholders. If the director is, for their benefit, using their position and/or inside knowledge to take advantage of shareholders, there may be a strong argument for shareholders to bring an independent claim.
What are the director's duties and liabilities in situations of company insolvency?
At the point of insolvency, the director's legal duties are owed to the creditors. It’s important to understand the rules around trading when insolvent and keep clear records of conversations and emails.
When is a director in breach of fiduciary duties?
A person will breach their duties as a company director if they don’t comply with sections 171 to 177 of the Companies Act 2006.
Is failure of directors' fiduciary duty a criminal act?
If a company director breaches any of the above fiduciary duties, they could face civil action and, in some cases, criminal sanction.
What remedies exist for a director’s breach of duty?
The company can bring a claim against a director if it can prove that the breach of duty(s) caused it to suffer loss. Remedies include:
- An injunction prevents the director from carrying out or continuing with the breach
- Restoration of company property
- An order forcing the director to hand over any personal profit obtained via the breach
- Rescinding of a contract in which the director failed to disclose a conflict of interest
It’s vital for the company and/or its shareholders to seek advice from an experienced company law solicitor if they wish to claim a director for breach of directors’ duties.
Get legal assistance from LawBite
Any director concerned that they have already breached one or more of their duties or are at risk of doing so should seek expert legal guidance at the first opportunity. To ensure you comply with the director's duties:
- Read your company’s constitution, Articles of Association, resolution, and agreements to ensure you understand the duties
- Know the skills and experience required of a company director in your position, and if there are gaps in your knowledge, undertake continuing professional development to fill them
- Double-check that your decisions are independent and can’t be seen as influenced by another
Be mindful of possible conflicts of interest between yourself or a family member
With extensive expertise, LawBite has successfully assisted companies from diverse industries and their directors in accomplishing their commercial aspirations. If you have any questions concerning directors’ duties, you can book a free 15 minute consultation with one of our expert corporate lawyers or call us on 020 3808 8314.