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Directors’ Duties

Introduction

If you are a company director, or you are considering becoming a director and are curious as to the obligations imposed upon them, you would be best advised to read the guidance from Companies House, and to consult a solicitor. In addition, you could review the Companies Act 2006 (“the Act”) for yourself, in order to gain an overview of the main requirements.

The general duties of directors are set out in section 171 to 177 of the Act and are largely a codification of the common law. This means that the obligations on directors have not substantially changed since the Act came into force, but simply that they are now set out clearly in a single piece of primary legislation rather than in various court judgments.

Duty to act within powers

Under section 171 of the Act, a director must act in accordance with the constitution of their company, and must only exercise their powers for the purpose for which those powers are conferred. This means that a director’s powers can only be used for their proper purposes, replacing the common law principle that directors should act in accordance with the company’s Memorandum and Articles. Whether or not a power has been used for its “proper” purpose can be deduced from previous cases.

Duty to promote the success of the company

A director must act in good faith to promote the success of their company, in accordance with section 172 of the Act. In particular, he must take into account various considerations, including: the likely long-term consequences of a decision, the interests of the company’s employees, the need to foster the company’s business relationships, the impact of the company on the community and environment, the desirability of maintaining a reputation for high standards, and the need to act fairly between members of the company.

Duty to exercise reasonable care, skill, and diligence

Under section 174 of the Act, directors must exercise reasonable skill, care and diligence. The standard expected is at least that of a person with the general skill and experience a director would reasonably be expected to possess. However, if a director has particular expertise in a given area, he will be held to a higher standard in that area, in accordance with the level of his expertise.

Other duties

Directors are also bound by the Act to exercise independent judgment, avoid conflicts of interest between their business and personal interests, not to accept any benefits (i.e. bribes) from third parties, and to declare any interest (direct or indirect) in a proposed transaction involving the company. These provisions are aimed at promoting business transparency and preventing corruption.

In addition, directors are responsible for preparing and delivering documents to Companies House, again in accordance with the provisions of the Act. Such occasions include annual returns and accounts, notifications of any changes to the company’s officers or their personal details, notification of any change to the company’s registered office, the allotment of shares, and the registration of charges.

If you would like advice about your obligations as the director of a company, or regarding any other company law issues, please contact Salim Mansoor.
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