Company directors are subject to numerous duties which are codified in the Companies Act 2006 (the ‘Act’). The primary aim of the duties is to protect the shareholders of a company by ensuring that directors are accountable for the way in which they manage the day-to-day activities and decisions within the company.
It is often mistakenly thought that directors can act how they wish when managing company affairs particularly where the directors are also shareholders of the company. However, it is important to note that they are still subject to the duties laid out in the Act which we will consider in turn.
1. Duty to act within powers
Directors must act in accordance with the company’s constitution which is made up of aggregate fundamental principles or established precedents determining how the company is to be governed. Sources of a company’s constitution include, without limitation, the Articles of Association and other agreements of constitutional nature such as a Shareholders Agreement. A director must only exercise their powers for the purpose for which they were given ensuring that they are not influenced by any improper purpose. Directors should be mindful that they have the requisite authority to make a particular decision.
2. Promote the success of the company
Directors are required to act in the way they consider to be in good faith, most likely to promote the success of the company and in the best interest of the members as a whole. This is quite a subjective approach as directors are required to use personal judgment to consider whether they are acting in good faith and therefore as guidance, the Act stipulates numerous factors which directors are required to consider when making decisions. It is advisable for directors to keep detailed records of decisions made with explanatory notes of why that decision was made. This may be useful to potentially protect directors against claims for breach of duty.
3. Exercise independent judgment
Directors must exercise independent judgment when making decisions. This means that a director must act in the best interests of a company as a whole, and not to represent the interests of a sole shareholder or a shareholder group or be dominated by another director or shareholder. Directors may seek independent legal advice in relation to their rights and responsibilities and the possible implications to enable them to make informed decisions.
4. Exercise reasonable care, skill and diligence
It is a requirement that directors exercise the care, skill and diligence which would be exercised by a reasonably diligent person with:
a) The general knowledge, skill and experience which may reasonably be expected of a person carrying out the same functions as that director in relation to the company; and
b) The general knowledge, skill and experience which that director actually possesses.
This duty is subject to both an objective and subjective test. The minimum requirement is for a director to be expected to exercise the care, skill and diligence that another director in a company of a similar nature would exercise. However, if the director has a particular skillset, then they would be expected to meet that higher standard set by that skillset.
5. Avoid conflict of interest
Directors must avoid situations in which they have or could have a conflict of interest with the company. This duty particularly applies to the exploitation of property, information or opportunity and it is immaterial whether or not the company could actually advantage from the property. There are numerous examples of what could be considered to be a conflict of interest including but not limited to:
• Becoming a supplier or customer of the company
• Making a profit from directorship
• Becoming a director of a different company.
Conflicts can be avoided where they are authorised by other directors who have no direct or indirect interest in the transaction. If a director considers there to be a potential conflict of interest, then it is advisable for them to take independent legal advice to avoid a breach of duty.
6. Not to accept benefits from third parties
A director must not accept any benefit (including a bribe) from a third party that has been offered because of the directors’ position or because of something they can do or do not do because they are a director. There is no need for the company to suffer harm for this duty to be breached; it is the directors’ acceptance and reason for which the benefit was offered that are considered. The duty is not infringed if the acceptance cannot be reasonably regarded as resulting in a conflict of interest, however, this is a difficult matter to judge. Therefore, it is always advisable for a company policy to be put into place relating to the acceptance of gifts and hospitality to help set a guideline and standard.
7. Declare an interest in a proposed transaction or arrangement with the company
Directors must declare the nature and extent of any interest to the board if the company is entering into a contract, transaction or arrangement in which the director has a direct or indirect interest. The disclosure must be made before the transaction is entered into. If the transaction has already been entered into, then a declaration must be made as soon as reasonably practicable.
The Act imposes other obligations beyond the abovementioned directors’ duties, for example, preparation and submission of annual reports and accounts and duties of confidentiality and health and safety to name a few.
Directors owe their duties to the company and as a result the company will be the only entity able to enforce them. Remedies may include damages or an injunction. Breach of certain duties may constitute a criminal offence which could result in a fine, disqualification or imprisonment in more serious cases. It is therefore imperative for directors to be aware and informed of their rights and responsibilities to prevent a breach.
If you are a director or person with significant control and have any questions relating to Corporate or Commercial matters, then please do not hesitate to contact our experienced team at Willsons Solicitors.
By Manisha Walia of Willsons Solicitors