Directors' Duties

The roles and responsibilities of a company director go beyond the day-to-day operations and strategy of the business. Our team of corporate lawyers are experienced in advising businesses on directors' duties and responsibilities.

Below is a short guide in the relevant duties that apply to directors.

Directors’ Statutory Duties

The Companies Act 2006 sets out seven basis principles governing a company director’s behaviour, by imposing specific duties on the director. These are:

• The duty to act within the director’s powers. The law, along with the company’s constitution, sets out the powers held by a director. These powers relate to the matters upon which a director can take action or make decisions on behalf of the company, and the procedures which must be followed.
• The duty to promote the success of the company. This does not simply mean that a director must always make decisions so as to maximise the company’s profit. The law provides that the director must also always consider:
  • the likely long-term consequences of his or her decisions;
  • the interests of the company’s employees;
  • the company’s business relationships with suppliers, customers and others;
  • the impact of the company’s operations on the environment and community;
  • the company’s reputation for high standards of business conduct; and
  • the need to act fairly as between shareholders.
• The duty to exercise independent judgement. Company directors should always act independently and not allow themselves to be controlled by others.
• The duty to exercise reasonable care, skill and diligence. This will include an element of subjectivity if the director has any special skill or knowledge. For example, a company director who is also an accountant would have a higher duty of care in financial management than one who has no special knowledge of financial matters.
• The duty to avoid conflicts of interests. Directors must not allow themselves to fall into situations where their duties to the company are in conflict with their personal interests or duties to others.
• The duty not to accept benefits from third parties. A director may not accept any benefit (this would include bribes) which is offered simply because of his or her position as director.
• The duty to declare interests in a proposed transaction with the company. Directors must inform the company if there is any proposed transaction with the company in which the director has a direct or indirect interest. The company’s articles of association will usually provide that a company may still be involved in the decision-making process regarding such transactions, if the director has properly declared his interest.

Action against a director for a breach of his duties can generally only be brought by the company. However, where breaches of directors’ duties are prejudicial to shareholders, in certain circumstances, the shareholders themselves may take action.

Other responsibilities of directors

In addition to the statutory duties set out above, directors are also required to keep proper accounting records, which properly reflect the financial affairs of the company. They are also required to maintain up-to-date registers of shareholders and directors, and a record of all shareholder and director resolutions. These records are commonly called the statutory books.

Personal liability for the company’s affairs

A company is a distinct and separate legal entity from its directors (or shareholders). While directors who carry out their duties properly are generally free from personal liability, there are certain circumstances where a director may be personally liable, as follows:

• If a director is in breach of his duties, he may be personally liable for any loss the company suffers as a result.
• Company directors may be criminally liable if they provide information regarding the company’s affairs which they know to be false or misleading, if the intention is to deceive creditors or shareholders.
• Directors may be liable to shareholders if they knowingly permit any transfer of shares in contravention of restrictions in the company’s articles of association.
• If the company is guilty of tax evasion, the directors may, in certain circumstances, become personally liable for the unpaid tax.
• If the director allows the company to trade knowing that it is insolvent, he may be personally liable for obligations incurred after the point at which he became aware of the insolvency.

Protecting directors and others

There are steps company directors can take to protect themselves against liabilities and claims for breach of duty. There are also steps the company can take to protect it against wrongful acts by its directors. Useful measures include:

• Ensuring that the articles of association make clear any relevant issues, such as whether directors can vote on issues in which they have an interest.
• Ensuring that the books and records of the company are accurate and kept up to date.
• Putting proper service contracts in place between the company and the directors.
• Purchasing a D&O insurance policy.

Appointment and removal of directors

Ultimately, unless the articles of association (or shareholders agreement) provides otherwise, a director of a company serves at the will of a majority of the shareholders.

However, in the absence of bespoke arrangements, the process of removing a director against his will can be challenging. Broadly speaking, the shareholders must vote on the matter at a general meeting, on not less than 28 days' notice, and a simple majority of the shareholders’ votes will be sufficient to remove the director. This is on the basis that the board approve the convening of a meeting and circulation of the shareholders resolution. If not, further preparatory processes can be taken by the shareholders in order to requisition the meeting.

A director will automatically be removed if they die or if they are the subject of a Directors Disqualification Order. A director may also generally resign at will.

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