A general guide to director’s duties

Here we take a look at the legal duties owed by the directors.

If you have any questions on this note or require advice on any other business matter please email Andrew Bradley on andrew@bradleyhayneslaw.co.uk or call 01905 900939.

If you are looking for advice on duties when a company is in financial difficulty, we have note in our advice section.

Director’s Duties

What duties do directors of a company owe?

It is very important that a director understands what duties they owe to their company. The Companies Act 2006, which governs corporate and company law, sets out 7 general duties that a director must follow. These are:

• To act within their powers.
• To promote the success of the company.
• To exercise independent judgment.
• To exercise reasonable care, skill and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare an interest in a proposed transaction or arrangement.

Who are these duties owed by?

The general duties apply to all the directors of a company. “Director” is defined to include any person occupying the position of director, which includes a ‘de facto director’ who is a person acting as if they are a director and is treated as such by the Board, but has not validly been appointed as a director.

How long does a director owe these duties for?

In general, a director’s duties to the company will start when they became a director, but after resignation, they will not continue to owe the general duties to the company. However, the Companies Act 2006 provides that certain aspects of two of the duties will continue to apply even after a person ceases to be a director. These are the duty to avoid conflicts of interest with regard to the exploitation of property, information or opportunity of which the director became aware at the time they were a director, and the duty not to accept benefits from third parties in respect of things done or omitted by them before they ceased to be a director.

The duties considered in more detail

Duty to act within powers –  a director must act in accordance with the company’s constitution, which is widely defined as the company’s articles and any resolutions and/or agreements passed by the Board. Under this duty, a director must only exercise powers for the purposes for which they are conferred.

Duty to promote the success of the company – a director 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. In doing so, the director must have regard (among other matters) to:

• The likely consequences of any decision in the long term.
• The interests of the company’s employees.
• The need to foster the company’s business relationships with suppliers, customers and others.
• The impact of the company’s operations on the community and the environment.
• The desirability of the company maintaining a reputation for high standards of business conduct.
• The need to act fairly between the members of the company.

Duty to exercise independent judgment – a director must exercise independent judgment without subordinating their powers to the will of others. For example, a director could not agree with a third party to vote at board meetings in any particular way, even if voting in that way would not have otherwise breached his or her duties to the company.

Duty to exercise reasonable care, skill and diligence – a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both:

• The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
• The general knowledge, skill and experience that the director actually has.

Duty to avoid conflicts of interest – a director must avoid situations in which they have (or can have) a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. In particular, this applies to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity. It is important to remember, as explained above, that this duty will continue even after a person ceases to be a director.

Duty not to accept benefits from third parties – a director must not accept any benefit (including a bribe) from a third party which is given because of his or her being a director. This duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Benefits conferred by the company, its holding company or subsidiaries, and benefits received from a person who provides the director’s services to the company, are excluded. Again it is important to remember, as explained above, that this duty will continue even after a person ceases to be a director.

Duty to declare an interest in a proposed transaction or arrangement – a director must declare to other directors the nature and extent of any interest, whether direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. An interest of another person in a contract with the company may require the director to make a disclosure under this duty, if the other person’s interest amounts to a direct or indirect interest on the part of the director. An example of an indirect interest is if the proposed transaction is with a person in which the director is related to.

What are the consequences of a breach of these duties?

If the shareholders of a company suspect a director has breached his or her duties to the company, they can bring a claim against that director on behalf of the company; this is known as a ‘derivative claim’. A derivative claim may be brought in respect of an alleged breach of any of the general director duties listed above. It is vital to note that a director does not have to have benefited personally from the breach in order for a claim of this type to be brought.

If you have any questions on this note or require advice on any other business matter please email Andrew Bradley on andrew@bradleyhayneslaw.co.uk or call 01905 900939.