Guest legal blog post regarding directors’ duties under the Companies Act 2006 in the UK.
Directors are open to claims for breach of duty and sanctions such as disqualification from office or a criminal offence if they are not familiar with their duties under the Companies Act 2006 (the “Act”) which codifies the duties of directors.
A director’s principle duties are as follows (subject to permissible amendments made to the company’s constitutional documents):
Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)
This duty is related to a director’s liability for wrongful trading and whether a director can be held liable for wrongful trading is measured by: (i) comparing a director’s actions with the standard expected of a reasonable director in the same role; and (ii) considering the director’s own knowledge, skills and experience. In the event of a breach of this duty the most likely remedy for the company is damages.
Duty to Promote the Success of the Company (Section 172)
The duty to promote the success of the company requires a director to act in a way that is in the best interest for the company as a whole. This duty requires a director to have regard for the following (which is a non-exhaustive list):
- The long term consequences of any decision
- Employee’s interests
- The company’s relationships with stakeholders
- Impact on the community and environment
- Maintaining a reputation of high standard
- The need to act fairly between members of the company
Duty to Act within Powers (Section 171)
This duty simply requires a director to act in accordance with the company’s constitution including compliance with any resolution or other decision made in accordance with the constitution.
Duty to Exercise Independent Judgement (Section 173)
The duty to exercise independent judgement does not preclude a director from obtaining professional or other advice but the director must ensure that any decision is made based on his or her own judgement.
Duty to Avoid Conflicts of Interest (Section 175)
The nature of this duty is axiomatic; directors must avoid situations where they have or can have either a direct or indirect conflict with the company’s interests without disclosure to and authorisation from the company.
Duty not to Accept Benefits from Third Parties (Section 176)
This duty essentially prevents a director from making a secret profit occasioned by being the director of the company. It does not apply where accepting a benefit involves no conflict of interest.
Duty to Declare Any Interest of the Director in a Proposed Transaction or Arrangement (Section 177)
A director is required to disclose the nature and extent of his or her interest before entering into a transaction. This duty is not binding where there cannot be a conflict of interest or where the other directors are aware (or ought to be aware) of the director’s interest.
If you would like further information on either company law or director’s duties then you should speak with a commercial or corporate law firm whose business lawyers will be able to advise further.
Author: Oracle Law