Thou shalt not breach: Directors’ Duties

For company directors, a once flimsy set of guidelines has over the decades evolved into more concrete duties. If these are contravened, they can lead to personal liability. It’s the price directors pay for the towering influence they exert over organisations whose fortunes can make or break livelihoods (and the economy). However the Companies Act 2006, which came fully into force in October 2009, manifests a very modern need for greater transparency and shareholder-cooperation among directors. The 2006 Act updates pre-existing duties and includes new ones which directors must observe. These duties are briefly summarised below:

-          Duty to act within their powers

A director can only act within the remit of the company’s constitution and only exercise those powers for the purposes for which they are conferred. Typically, the ‘constitution’ is the company’s ‘Articles of Association’.

-          Duty to promote the success of the company

Directors must, in good faith, act in a way which will most likely promote the success of the company, having regard to a non-exhaustive list of factors which include: the likely long-term consequences of decisions made, the interests of the employees, and the impact of the company’s operations on the community and the environment.

-          Duty to exercise independent judgment

Directors may consider the opinions of others, or may even emulate another’s opinion, but must have used their own independent judgment in making decisions pertaining to the company.

-          Duty to exercise reasonable care, skill and diligence

Directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with: (i) the knowledge, skill and experience we can reasonably expect of a person carrying out the same functions as the director in relation to a company, and; (ii) the knowledge, skill and experience that the director has. Thus, a director with more experience/greater knowledge (eg one who is also an accountant or lawyer) will need to meet a higher standard to satisfy this duty.

-          Duty to avoid conflicts of interest

Directors must avoid situations in which they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company; directors should be particularly mindful of this duty in transactions with third parties.

-          Duty not to accept benefits from third parties

Directors must not accept any benefit, be it monetary or non-monetary, from a third party by virtue of their directorship, or by doing (or indeed not doing) something as a director. However, this duty doesn’t apply if the benefit is unlikely to create a conflict of interest.

-          Duty to declare interest in any proposed transaction or arrangement with the company

Directors with an interest in a proposed transaction with the company must declare the nature and extent of that interest to the company board. For example, if a company plans to purchase commercial property in which a director of theirs has a stake, the director must disclose this interest to the board.

 

Whilst some sections of the media focus on FTSE-level remuneration, successful company directors must act with honesty, integrity, and alertness to corporate social responsibility.

 

If you’d like to know more about the duties of directors, or are thinking of setting up a company, then please contact San Chima on 020 7790 2000 or email him at schima@adamslaw.co.uk.

 

~ Krishnan Nair

 

 

 

Leave a comment

18 Comments.

  1. Really great post, I’ll definitelly come back on your website.

  2. What are you saying, man? I understand everyones got their own thoughts and opinions, but really? Listen, your website is neat. I like the hard work you put into it, specially with the vids and the pics. But, come on. Theres gotta be a better way to say this, a way that doesnt make it seem like everyone here is stupid!

  3. This is basically out of an LPC textbook!

  4. I tweeted this post! : )

  5. A note to Moggy (above commenter). Whether here, in an LPC book or elsewhere, directors’ duties don’t change. Good article.

  6. Great post, useful to know DIrectors have all these obligations laid down in statute

  7. Greetings I stumbled on your site by mistake when i searched Google for directors duties stuff, I have to say your site is definitely useful I also enjoy the style, its great!

  8. Let me just say: wow, what a relief it is to find someone who actually know what they are talking about on the internet! More people need to read this.

  9. Thank you for the good writeup.

  10. Great information, if a little shallow in knowledge. I guess for more we have to pay, eh?

  11. Wonderful work! This is the type of information that should be shared around the internet.

  12. Anarchy is the only way

    Thou shalt not breach the main rule: MONEY is KING

  13. Hey you. I do not know if it’s too much to say, but this blog is extremely well written.

  14. Remember to excuse my own my English speak, I’m still learning. I much like your website greatly, I think it is worth it to read and I saved a bookmark in my computer memory.

  15. I’m sure these get breached every day up and down the country. It’s the catching the guys that is so difficult!

  16. Directors should always have the best interests of the SHAREHOLDERS at heart!

  17. Good idea to memorise these, not just leave it to the lawyers…