Director’s Duties
Who are directors?
Directors are the individuals who are responsible for the day-to-day operations of a company, whether it is a private company limited by shares, a public company limited by shares, or a private company limited by guarantees. This article aims to provide insight into the various duties owed by a director. If you would like to explore more insight into company law related topics, please click here.
Tasks that a director may undertake include:
Implementing company objectives and policies
Progressing towards the achievements of these objectives and policies
Appointing senior members and managers for the company
Fundamentally directors owe a duty to the company, however when a company is in financial difficulties and nearing insolvency their duties are subsequently owed to the company's creditors as a whole.
Types of directors
Directors can have differing levels of responsibility depending on the type of director they are. Examples of types of directors include:
De jure director – appointed as a director with all formalities complete including appointment through Form AP01 for an individual or Form AP02, to appoint a corporate body, at Companies’ House
De facto director – assumed responsibility as a director of the company without formalities and correcting appointment procedures. De facto directors still face the same legalities as a de jure director.
Shadow director – a director acting behind the scenes, often someone that should not be acting.
Executive director – normally a de jure director who works full time for the company as an employee and is paid a salary.
Non-executive director – normally a de jure director who is not full time or an employee of the company, but attends board meetings and gives advice.
Director’s Duties
The duties of a director are expressed under statute, namely the Companies Act 2006 and implied through common law. Companies Act Section 171-177 covers the seven main statutory duties.
Section 170 provides that the general duty of a director is only owed to that company. Emphasising the position of that company as a priority to that director and ensuring that all directors comply with the duties covered by the Companies Act 2006.
S.171 states “A director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred”. The company’s constitution includes the company's articles of association and memorandum. It is therefore important that Directors are familiar with the Company’s constitution.To find out more about a company’s constitution, click here. Directors must also only act within their role and should not exceed this.
S.172 states directors “must act in... good faith, promote the success of the company for the benefit of its members as a whole”. This means that they have an overarching duty towards the success of the company and their colleagues. This includes acting fairly between members of the company, understanding long term consequences of decisions impacting the company, understanding the company’s operational impact on the community and environment.
S.173 states “A director must exercise independent judgement”. This section ensures that directors must not blindly follow others but independently and act with initiative. Directors, however can obtain professional advice but must exercise their own judgement when deciding whether to follow it.
S.174 states “A director of a company must exercise reasonable care, skill and diligence… expected of a reasonable person”. This means that directors must ensure they act to their best of their abilities and to a standard that that is expected of a reasonably diligent person.The courts take both a subjective and objective approach to a director’s actions, considering experience that the specific director has in addition to what's expected of a reasonable person carrying out those functions.
S.175 states “A director must avoid a situation in which he has or can have a direct or indirect interest that conflicts or may conflict with the interests of a company. This means conflicts like diverting an opportunity away from your company elsewhere and exploiting company property, information, or opportunities, must always be avoided.
S.176 states “A director must not accept a benefit from a third party conferred by reason of being a director or doing anything as a director”. This means that directors must avoid for example,a gift that may seem to be of influence in their actions as a director to their company, tying very closely to s.175 - conflict of interest.
S.177 states “If a director is in any way, directly or indirectly, interested in a transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors”. This section ensures that directors must disclose all interest regarding business dealings and transactions to their colleagues. There must be clarity amongst members, to prevent any undisclosed matters and ensure transparency.
Remedies resulting from a breach of director’s duty
Remedies for breaches of director duties are covered in Section 178 Companies Act 2006. Sections 171-177, except section 174 are fiduciary in nature, meaning that they are duties that do not allow directors to use their positions for personal benefit. Section 174 is a common law duty expected to be complied.
Remedies include:
Damages paid by the director in breach, in the form of compensation for any loss suffered by the company;
Restoration of the company’s property that was taken and given back in the same condition it was taken in;
The director could be asked to account for any profits made by their breach; or
Rescinding from any contracts entered into resulting from the breach.
Directors can also face disqualification for a term of 6 months to up to 15 years under the Company Director’s Disqualification Act 1986. The three criteria to be disqualified through this act includes, the director being found guilty of breaching their duties three or more times within the last 5 years, he/she is a director of a company that has become insolvent and the director is found guilty of wrongful trading under the Insolvency Act 1986.
Author: Aminoor Masoom -
Author: Aminoor Masoom -
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
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