The directors of a UK company have a number of duties and obligations which they are legally required to meet. This article provides basic guidance notes on the general duties of a director of a UK company under the Companies Act 2006.
Directors owe the following duties to the company of which they are a director (some of these are considered in further detail below):
- to act within their powers
- to promote the success of the company
- to exercise independent judgment
- to exercise reasonable skill, care and diligence
- to avoid conflicts of interest
- to declare any interest in a proposed transaction or arrangement involving the company
- not to accept benefits from third parties
Acting within powers (section 171 of the Companies Act 2006)
A director must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they were conferred. To ensure compliance with this duty, directors should ensure they are fully aware of their company’s memorandum and articles of association (and any other relevant constitutional documents), including, in particular, with respect to any provisions applicable to directors’ powers, authority and decision making, and any specific objects of the company.
As a company grows and develops it may be appropriate to review the articles of association from time to time so they remain fit for purpose; giving the directors the freedom to carry out their proper work in relation to the company whilst providing the shareholders with adequate safeguards to regulate the directors’ activities.
Promoting the success of the company (section 172 of the Companies Act 2006)
A director must act in a way which they consider (in good faith) is most likely to promote the success of the company for the benefit of its shareholders as a whole.
In order to fulfil this duty, the Companies Act 2006 requires directors to consider (amongst any other relevant considerations) the likely long term consequences of a decision; the interests of the company’s employees; business relationships with suppliers, customers and others; the impact on the community and environment; maintaining a reputation for high standards of business conduct; and acting fairly between the shareholders.
It is important to note that in certain circumstances, notably in relation to insolvency and near-insolvency, this duty can become subject to a requirement for the directors to prioritise the interests of the creditors of the company.
Exercising reasonable skill, care and judgment (section 174 of the Companies Act 2006)
Directors must exercise reasonable skill, care and judgment.
Reasonable in this context means the level of skill, care and diligence that would be exercised by a reasonably diligent person with (i) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by a director in relation to the company; and (ii) the general knowledge, skill and experience that the director has themselves.
Whilst the first limb of this definition is objective, the second limb is subjective, meaning that any specialist or particular knowledge or experience that a director has would be relevant in determining what can be reasonably expected of them.
Avoiding conflicts of interest (section 175 of the Companies Act 2006)
A director must avoid situations in which they have a direct or indirect interest that conflicts or may conflict with the company’s interests, especially in relation to the exploitation of any property, information and opportunity.
There is a limited exception, in that this duty does not apply to a conflict of interest arising in relation to a transaction or arrangement between a director and the company (although other legal requirements may apply depending on the nature of the transaction or arrangement, for example, if it is a substantial property transaction, long-term service contract, loan or quasi-loan, or payment on loss of office).
It is also worth noting that this duty will not be infringed:
- by situations which cannot reasonably be regarded as likely to give rise to a conflict of interest; or
- by matters validly authorised by the directors.
On the latter point above, an authorisation will be valid if agreed at a board meeting that is quorate without counting the interested directors and without counting any interest director’s votes. Additionally, (for private companies) the articles must not prohibit such authorisation being given or (for public companies) the articles must specifically allow for it.
Declaring interests in transactions or arrangements involving the company (section 177 and section 182 of the Companies Act 2006)
A director must declare the nature and extent of any direct or indirect interest which they have in a proposed or existing transaction or arrangement with the company to the other directors.
This declaration can be made at a board meeting or in writing, and must be made (in respect of proposed transactions or arrangements) before the company enters into the transaction or arrangement, or (for existing transactions or arrangements) as soon as reasonably practicable. A director must update any declaration they have given that subsequently proves to be or becomes inaccurate or incomplete.
However, no declaration is necessary where a director is not aware of their interest or the transaction or arrangement in question; or if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors are already aware of it.
Not to accept benefits from third parties (section 176 of the Companies Act 2006)
A director of a company must not accept a benefit from any third party (meaning anyone other than the company or another member of the company’s group) arising by reason of being a director or doing (or not doing) anything as a director.
This duty will not be infringed by a director accepting a benefit that cannot reasonably be regarded as likely to give rise to a conflict of interest or duties.
As a practical example, accepting offers of corporate hospitality should be considered in light of this duty (as well as anti-bribery legislation), and factors which are likely to be relevant to consider include the value of the benefit, the circumstances, normal industry practice and any expectation in relation to future conduct.
Consequences for breach of director duties
The consequences for breach of the directors’ duties described above are that the company may bring claims against a director in default (or alternatively, the shareholders may have the right to bring a derivative claim against the director in the name of the company).
If such a claim is successful then a court make an order including any combination of:
- setting aside a transaction or arrangement to be set aside;
- restoration of the company’s property;
- the director to pay damages or an account of profits to the company;
- an injunction; and/or
- disqualification from acting as a director.
Failure to declare an interest in an existing transaction or arrangement (as required by section 182 of the Companies Act 2006) also constitutes a criminal offence, for which a defaulting director may be liable on conviction to a statutory fine.
If a court considers that a director who has breached their duties has acted honestly and reasonably and ought reasonably to be excused having regard to all the circumstances of the case, it has the power to relieve the director from liability on such terms as the court thinks fit.
In very limited circumstances, the shareholders of a company (excluding the director in question and anybody connected to them) may be able to waive or ratify a breach of the directors’ duties and specific advice should be taken.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Paramjit Sehmi or write to us using the contact form below.