Partner Peter Woolley, in Thames Valley law firm Blandy & Blandy’s Corporate & Commercial team, highlights the role of directors and the statutory duties that come with holding this position, as detailed in the Companies Act 2006 (“CA 2006”).
Becoming a director of a limited company involves much more responsibility than merely registering your name as a director of a company at Companies House. New directors are usually appointed by the existing board of directors, although they can also be appointed by shareholders. The directors are in charge of the management of the company, both at a strategic and at an operational level.
Directors are expected to attend and contribute to board meetings, whilst also being responsible for ensuring that the company’s obligations are fulfilled. Therefore, deciding whether to appoint an additional director(s) of a company is not a decision to be taken lightly.
Directors have numerous general duties and responsibilities which are detailed in sections 171 – 177 of the CA 2006. These duties can be summarised as follows:
S.171. Duty to act within powers
Directors must act in accordance with the company’s constitution. “Constitution” is widely defined for this purpose and will always include a company’s articles of association (the “Articles”). It is important for directors to be familiar with the Articles and any other constitutional documentation as these documents may restrict directors’ powers in certain circumstances and/or in certain ways. If directors are found to have acted beyond their powers, they may be in breach of this section, thus potentially leaving them with unfavourable financial penalties.
S.172. Duty to promote the success of the company
Directors must act in a way that they consider, in good faith, would most likely promote the success of the company for the benefit of the shareholders. However, shareholders are not the directors’ sole consideration, they must also account for (including, but not limited to):
- The interests of company stakeholders (i.e. employees, customers and suppliers);
- The likely long-term consequences of decisions;
- Potential impacts of company operations on the community and the environment; and
- The desire to maintain the company’s reputation.
S.173. Duty to exercise independent judgment
Directors must form their own opinion on company activities, they should not rely on the knowledge of their counterparts or instructed experts. If they are not well informed about the matter in hand, they must conduct their own research to ensure they are in a position to develop their own view. If professional advice is obtained, directors must take a view as to whether this should be followed.
S.174. Duty to exercise reasonable care, skill and diligence
A director’s ability to exercise these attributes is measured against a “reasonably diligent person” with the expected knowledge, skill and experience of someone who would undertake these functions as a director. However, a director with a professional qualification, such as a legal practicing certificate, may be held to a higher standard than their less qualified counterparts as their actual knowledge, skill and experience will be taken into account.
S.175. Duty to avoid conflicts of interest
If a director has an interest of a personal or business nature which will or could be impacted by an upcoming company decision, then they are obliged to disclose such interest to their fellow directors. Disclosure is vital in these circumstances, as directors’ decision making is founded upon impartiality and so anything that may affect their objectivity poses a potential threat to the legitimacy of the board’s conclusion on a matter. There are certain circumstances where such interests would not lead to a conflict, but provided they are disclosed by the director, this duty will not be infringed.
S.176. Duty not to accept benefits from third parties
Directors must decline any benefits that have been received as a result of them holding this post. Similar to s.175 above, such acceptance runs the risk of impacting a director’s impartiality, thus leading to a conflict of interest.
S.177. Duty to declare interest in proposed transaction or arrangement
The final general duty requires directors to declare any direct or indirect interest in an existing or proposed transaction or arrangement. Not only must the interest itself be declared, but its nature and extent must also be relayed either at a directors meeting, in writing or via a general notice. Any director who declares an interest is also required to update their fellow directors should the accuracy of their declaration change.
The general duties are owed to the company, and they are not owed to shareholders or fellow directors. It follows that only the company will be able to enforce them. However, shareholders may be able to bring a derivative claim for breach of duty on the company’s behalf; moreover, a company may fall into the hands of its creditors leaving the directors effectively exposed to them. Breach of the general duties could be grounds for the termination of an executive director’s service contract, and it could also lead to a person being disqualified from acting as a director. In view of this, the general duties should not be treated lightly.
For further information or legal advice, please visit www.blandy.co.uk.