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Directors Duties

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  3. 2020

WE LVE NUMBERS!

If you have been appointed a director of a Company this imposes certain requirements of you, both by virtue of Companies Act 2006 but also more generally in connection with ensuring that the business is able to continue and fulfil its obligations to all of its stakeholders.

What is my role as a director?

The first step is to understand where the role sits within the governance structure of a company. A company is a separate legal entity from its directors and its shareholders.

The directors are in charge of the management of the company’s business; they make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations.

You will hear the term Board of Directors, but many companies have but a single director. No company is able to operate without a director.

The directors are effectively the agents of the company, appointed by the shareholders to manage its day-to-day affairs. The basic rule is that the directors should act together but typically may also delegate certain powers to individual directors or to a committee of the board.

You may also be a shareholder or an employee of the company (or both) and, if so, will have additional rights and duties going beyond those purely connected with your office as a director. It is crucial that you draw a distinction between these separate roles, 'wear the right hat for the job' and particularly record your decisions and in what capacity they are being made.

What are the 7 general director duties under the Companies Act 2006?

1. Act within powers

You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.

The company’s constitution includes its articles of association and resolutions and agreements of a constitutional nature (e.g. shareholder or joint venture agreements). These can be obtained from Companies House and you should read these and refer to these to ensure that what you wish to undertake is permitted within the company constitution.

2. Promote the success of the company

This always seems as if it would go without saying. But you must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders and employees as a whole.

Success will generally mean a long-term increase in value but fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action.

3. Exercise independent judgment

You must exercise independent judgment and make your own decisions.

This does not prevent you from seeking professional advice and whilst independent judgment this does not mean acting not in accordance with the company’s constitution or an agreement which the company has entered into.

4. Exercise reasonable care, skill and diligence

You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
  • the general knowledge, skill and experience that you actually possess.

5. Avoid conflicts of interest (a conflict situation)

You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.

This duty is not infringed if:

  • the situation you are in cannot reasonably be regarded as likely to give rise to a conflict of interest.
  • the situation has been pre-authorised. Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.

Examples of potential conflicts are multiple directorships, personal interests, advisory positions, other profits and connected persons.

If you think you may be in a potential conflict situation you should:

Check the articles of association, seek approval and regulate your behaviour

6. Not accept benefits from third parties

You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.

This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. Declare interests in proposed or existing transactions or arrangements with the company

If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction you must do this before it is entered into. In the case of an existing transaction you must do this as soon as reasonably practicable. This duty is not infringed if:

  • your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest
  • an interest has not been declared because you are unaware that you have the interest or the other directors are already (or ought reasonably to be) aware of it.

Keeping a record

As there are substantial financial and criminal offences for failing to fulfil your directors duties it is often most important that you keep a record to prove you have considered and fulfilled these legal duties. These records should be kept for 10 years and they will be something that you may well have cause to be grateful for.

Useful Links:

Legislation legal duties associated with being a director

Companies House Guide: Being a company director 

Directors implications of breaches (to link to another article for our website)