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Directors' Duties - The do's and don'ts
As a company director you are responsible for the day-to-day running of the business and accountable for its success or failure. According to the Companies Act 2006 (CA 2006) there are seven specific duties you need to observe:
- to act within 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
Do you know what these duties involve and to whom they are owed?
You may often feel pressured by the company’s shareholders to act in a certain way. However, as a director you owe your duties to the company and not to its shareholders or other directors. If you are both a director and a shareholder of the company, you should keep the two roles separate, because your duties as a director still apply and you will need to observe them.
In general, only the company is able to enforce those duties against you as a director. In some circumstances shareholders may be able to bring a direct action against the directors, but this will be based on a special factual relationship between the directors and the shareholders and not on the legal relationship between the directors and the company.
Another misconception is that once you resign as a director your duties to the company will cease. Although this is true for most of the duties, it is not for all of them. The duty to avoid conflicts of interest as regards the exploitation of any property, information or opportunity you became aware of while you were a director, and the duty not to accept benefits from third parties for things done (or not done) by you before you ceased to be a director, will continue to apply.
The duties you owe to the company as a director are cumulative. This means that if in any given situation more than one duty applies you will have to comply with all of them.
What happens if a directors’ duty is breached?
If a duty is breached, the company may get an injunction, request the transaction to be set aside, seek restitution and account for the profits, request the company’s property which is held by the director to be restored and damages. Also, a breach of a director’s duty may result in the director been disqualified as a director under the Company Directors Disqualification Act 1986 and termination of his/her service agreement with the company.
The general directors’ duties are not the only things you need to be aware of. There are other key company law provisions and a variety of other laws and regulations setting several responsibilities for directors. E.g as a director you need to keep up-to-date books and records, maintain full and accurate accounting records, investigate, obtain and update information regarding Persons with Significant Control and comply with insolvency and health and safety legislation.
Being a director is not easy and the fact that you are exposed to numerous claims for personal liability makes the job even harder. A director may incur liability to the company for breach of his/her general duties, but also to third parties for misrepresentation, to employees for discrimination, to the company for costs while defending civil, criminal or regulatory proceedings and so on.
Mistakes can happen and there are ways to protect against liability, e.g. by the company indemnifying its directors or purchasing insurance for them. However, these are not without limitations and, therefore, you should make sure you understand what your duties are as a director and what you should (or not) be doing in any given situation.
If you are not sure of the extent of your duties and responsibilities in general, or in relation to a specific transaction, you should seek competent and commercial legal advice. Our corporate solicitors can help.
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.