Although many don’t realise it, being a director of a limited company is an onerous task. As a director, you personally owe many legal duties to the company.
Historically, it’s been difficult to find a clear guide to all of these duties and, although the new Companies Act 2006 compiles a list of most of the main ones, it’s incomplete. This article explains the duties of all directors in plain English and points out what will happen if you fail in your responsibilities.
The duties explained
The duty to act within the company’s powers – A director must always act in a way allowed by the company’s Articles of Association and decisions made by the Company.
A director must always act in a way allowed by the company’s Articles of Association and decisions made by the Company
The duty to promote the success of the company – A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the shareholders as a whole. When doing this, he must have regard to the following things:
- 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; and
- the need to act fairly between the members (shareholders) of the company.
This means that making the most money for shareholders (profits) should not be the only concern of a director; he must also consider these wider effects. Cousins Business Law’s advice is that the above checklist should be gone through when making decisions at board meetings, so that all the directors can leave an audit trail to show they have considered all these matters.
The duty to exercise independent judgment – This may arise, for example, if the bank or major funder wants you to act in a particular way. This duty can however be modified by agreement or by changing the company’s Articles of Association.
The duty to exercise reasonable care, skill and diligence – A director will be judged according to what would be reasonable in his role as well as any particular skills or knowledge he has. For example, a financial director would be held more culpable for financial errors than a general director.
However, all directors must perform to a minimum reasonable standard. For example, a sales director will not be able to get away with saying that he left financial director to deal with the finances and had no idea about them. It is his duty to find out.
The duty to avoid conflicts of interest – A director must avoid any situation where he has or could have a conflict or possible conflict of his interests with those of the company.
He cannot exploit any property, information or opportunity that comes his way because of company activity. For example, if in the course of running a company a director discovered a business opportunity, he cannot exploit this himself or by setting up another company, even if the first company could not take advantage of that opportunity.
There are a few exceptions to this, the most important being that the board of directors can authorise a director to exploit a particular opportunity even if there is a conflict.
The duty not to accept benefits from third parties – this prevents taking bribes but may also include benefits from being a director, shareholder, employee or adviser to a competing company.
The duty to declare interests in a proposed transaction or arrangement with the company – a director, or shadow director, must declare the nature and extent of any interest he has in a proposed transaction or arrangement to the board of directors whether he is directly or indirectly interested in it. A director is deemed to be aware of matters which he ought reasonably to be aware of.
This will arise particularly when a director is a shareholder, director, employee or adviser to another organisation or person with whom the company is about to enter into a transaction or arrangement.
The director must make the declaration in writing and before the company enters into the transaction. He is able to give what is called a ‘general notice’, which is where he declares an interest in another organisation or person and is therefore to be taken as being interested in any transaction or arrangement that that organisation or person might make.
The duty to declare interests in existing transactions or arrangements – A director should declare an interest before the company enters into a transaction.
This duty is primarily aimed at new directors, who should declare their interests when they are appointed. Clearly, if you have not already declared an interest you should have declared, you should do so now.
Common law fiduciary duties remain unaffected by the new Act and there is some overlap between them and the duties in the Act, e.g. to act in the company’s best interests, to use company property for legitimate company interests only, to act in accordance with the company’s constitution, to avoid conflicts of interest and to avoid making a secret profit.
Insolvency duties remain unaffected too, such as the duties to the company’s creditors when a company becomes technically insolvent and the duty to put a company into liquidation if an insolvent liquidation cannot reasonably be avoided – see Directors’ Responsibilities in Times of Financial Trouble.
If you breach these duties a court can hold you personally liable to pay back to the company any losses that it suffered or any profits that you made.
When Breaches May Come to Light
Generally, breaches of directors’ duties come to light in the following circumstances: when directors fall out with each other or the shareholders, when a director leaves, when the company is wound up or put into liquidation or administration, or when the company is sold.
Certainly, if you have any concerns and one of these circumstances is about to happen, you should take legal advice to minimise the risk of you having to pay lots of money back to the company.
However, it’s often difficult to predict when something might happen so the time to consider these duties and make sure you comply is now!