The importance of understanding directors’ duties
The Companies Act 2006 provides a code of company law for the UK and includes a whole host of rules which must be followed. It consists of 1300 sections and 700 pages so the rules are plentiful!
As part of this, the Act details the duties imposed on company directors by law, seeking to hold directors accountable for their behaviour. If any director breaches any of the duties then he/she will incur liability and action may be taken against them.
There are seven general duties under the Companies Act 2006, these are:
1.To act within powers (s.171)
Directors must act in accordance with the company’s constitution and only exercise powers for the purposes they are conferred. The company’s constitution includes its articles of association and resolutions and agreements of a constitutional nature.
2.To promote the success of the company (s.172)
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. When considering what is most likely to promote success of the company, the legislation states that a director must have regard to:
- The likely consequences of any decision in the long term
- The interests of the company’s employees
- The need to maintain business relationships with suppliers, customers and others
- The impact of the company’s operations on the community and the environment
- Maintaining a reputation for high standards of business conduct
- The need to act fairly as between the members of the company
3.Exercise independent judgment (s.173)
Directors must exercise independent judgement and make their own decisions. For example, a director could not agree with a third person to vote at a board meeting in any particular way
4.Exercise reasonable care, skill and diligence (s.174)
There is an objective and subjective element to this duty. Where a director has specialist knowledge, the higher subjective standard must be met.
5.To avoid conflicts of interest (s.175)
A director must avoid situations in which they have or can have a direct or indirect interest which conflicts with, or may conflict with, the company’s interests.
6.To not to accept benefits from third parties (s.176)
Directors must not accept a benefit from a third party which is conferred because of his or her being a director or not doing anything as a director.
7.To declare an interest in a proposed transaction or arrangement (s.177)
A director must declare to other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company.
These duties are owed by the directors to the company. This means that only the company will be able to enforce them. However, there are circumstances where shareholders may be able to bring a ‘derivative’ claim.
The consequences of a breach of duty aim to confiscate any profit made by the director in breach of their duties. The director in breach can be ordered to account for profits, return company property and pay compensation and/or damages. Further consequences can include rescission of contracts, injunctions against the director in breach and even fines and imprisonment in exceptional circumstances.
It is highly important that directors are fully aware of their duties to the company in order to avoid breaching any of these duties and incurring personal liability.
It is also important for the company to have a good understanding of all of these duties as they act as a form of protection to the company and its members by regulating directors’ behaviour.
If you would like to discuss the duties imposed upon directors, or if you believe that your business would benefit from reviewing its articles of association, then speak to GA’s company commercial team to obtain bespoke, legal advice.
Rebecca Jones, Trainee Solicitor