Being made a director of an SME, 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.
However, “with great power comes great responsibility” - wisdom straight from the Spiderman comics which applies equally to company directors and superheroes (they are of course often one and the same). For company directors, the Companies Act 2006 codifies the duties and responsibilities they must abide by.
In this article, we explain each duty, so you understand the compliance requirements thereby mitigating the risk of unpleasant encounters with regulatory and/or enforcement bodies.
What are the Directors' duties?
The directors' duties set out in sections 171 to 177 of the CA 2006 are:
- 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
Below is a summary of each director's duty in more detail:
1. Duty to act within powers
2. Duty to promote the success of the company
You may wonder why this duty has to be included in legislation - of course, you will 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 of 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 you must always rely on your own judgments to draw conclusions.
4. Duty to exercise reasonable care, skill, and diligence
The duty to exercise reasonable care, skill, and diligence means that in your role of 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 will be held to a higher standard than a director who does not possess those skills.
The days of being appointed as a company director thanks to coming from the ‘right’ family or having attended the ‘right’ school are long gone. To ensure you can fulfil your responsibilities as a director, you should be confident that you possess the necessary experience and qualifications required for such a position in your organisation’s market sector.
5. Duties relating to conflicts of interest
To not act in a way that could result in a conflict of interest is one of the most challenging of the codified duties. Specifically, you must be careful not to become personally involved in a situation in which property, information, or opportunity can or should be taken advantage of by the company. 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.
When it comes to disclosing possible conflicts of interests to fellow directors, the best advice is - ‘If in doubt, call it out’.
6. Duty not to accept benefits from third parties
As a company director, you must be extremely careful when accepting gifts or benefits, lest doing so results in a conflict of interest.
7. Duty to declare interest in proposed transaction or arrangement
You are required to fully disclose to the other directors any interest in a proposed commercial transaction or arrangement. You do not need to be a party to the transaction or arrangement - for example, if your spouse or partner is entering into an agreement with one of your competitors, you will have a duty to 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 must not act in a manner which breaches those duties.
The Companies Act also provides for a "derivative action" that allows shareholders and others to sue directors on behalf of the company.
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 is important to understand the rules around trading when insolvent and keep clear records of conversations and emails.
What is a breach of directors’ duties?
A person will breach their duties as a company director if they do not comply with sections 171 to 177 of the CA 2006. A breach may result in civil action and, in some cases, criminal sanctions.
Are directors liable for insolvency?
One of the main advantages of a limited liability company is that business owners will not be held personally liable for the organisation’s debts and contractual obligations. However, a director can be liable to creditors if the company becomes insolvent and the directors are found to have committed wrongful or fraudulent trading.
Wrongful trading is a statutory offence under section 214 and section 246ZB of the Insolvency Act 1986. These sections provide that once a director knows, or ought to know that it is inevitable that the company will become insolvent, they have a duty to take each of the steps a reasonably diligent person would in order to minimise potential loss to the company’s creditors.
Fraudulent trading occurs when a director deliberately takes actions for the purpose of defrauding creditors. This is a criminal offence and can result in an offender being sent to prison.
Any director who is 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 director's duties:
- read your company’s constitution, Articles of Association, resolution, and agreements
- know the skills and experience required of a company director in your position and if there are gaps in your knowledge undertake CPD to fill them
- double-check that the decisions you make are independent and could not be seen as being influenced by another
- be mindful of possible conflicts of interest, be it through yourself or a family member
You can get legal assistance from LawBite
If you have questions about your company's director's duties, LawBite is here to help.
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