Directors Duties: what are they?
Monday, June 12, 2017
The following article was written by Nabas International Lawyers, a trading name of Cubism Ltd. Based in London, Nabas is an international law firm that specialises in international and domestic business law.
What does a company Director do?
The director is the person responsible for the management of the company affairs and they owe the Company a number of duties. The duties arise from common law and they have been codified in the Company Act 2006, Part 10, Chapter 2. The company Act 2006 codify seven general duties of the Director towards the Company (S171-177). These are the list of duties:
Duty to act within powers
Directors have a duty to act in accordance to the constitution and within the powers conferred by the memorandum and the articles of association and to exercise their powers for proper purposes.
Duty to promote the success of the company
They must also act in good faith to promote the success of their company. To do so, the Act require to take into consideration, among the rest: the consequences in the long term of their decisions; the interest of the company employees; the importance of maintaining and increase relationships with suppliers, customers and others; the desirability of the company maintaining a reputation for high standards of business conduct; the impact of the company operations on the community and environment; the need to act fairly between members of the company. This list is not exhaustive and the director must consider all the factors and matters relevant to promote the Company’s success in their actions. Must be noted that if the company become insolvent, the duty is displaced and may be modified by an obligation to have regard to the interests of creditors as the company.
Duty to exercise independent judgment
Directors must also exercise their powers independently, they cannot allow anyone to control their powers as directors and cannot delegate their powers to others, unless authorised to do so by the Articles of Association. This principle does not exclude they could receive advice, but require they use their own judgment in deciding to rely or refuse the advice given.
Duty to exercise reasonable care, skill and diligence
They must exercise reasonable care, skill and diligence. This means acting with the care, skills, and diligence exercised by a reasonable person with the general knowledge, skill and experience that the director has or with those it is expected to have. A very experienced Director will be required a very high standard of care, skills and diligence. This duty in fact requires a person not to assume a position that they would not be able to fulfil, for example because they lack the necessary skills for the role or are too inexperience for the complexity of the position. Allocation of tasks and delegation is permitted, as it is for the Director to be confident and rely on the ability of their colleagues, as long as this is not an attempt to abrogate all the responsibility.
Duty to avoid conflicts of interest
A Director of a company must avoid a situation in which he has, or can have, an interest that conflicts, or may conflict, with the interests of the company; they must avoid conflict of interest and it is not relevant whether they were aware of it or not. This duty will not be infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or where it has been authorised to act.
Duty not to accept benefits from third parties
Another duty provided in the Company act is the duty to not accept third party benefits, when this may give rise to a conflict of interest, when offered to them as director or, for their doing (or not doing) anything as director. A benefit is a favourable or helpful factor, circumstance, advantage or profit.
Duty to declare interest in proposed transaction or arrangement.
They are also under a duty to disclose to the others directors the nature and extent of any interest existent in a proposed transactions or arrangement that the company is considering, when the Director is part of the transaction. This declaration in not necessary when the Director is unaware of the interest or of the transaction, when the interest can reasonably be regarded as unlikely to give rise to a conflict of interest or where there is only one director.
In addition to those duties provided by the Company Act the directors also have a duty of confidentiality, a duty to act in the interest of the company creditors.
These duties arise with the position of director and cease when the same terminates. The Company Act, though, provides that certain aspects of the duty to avoid conflicts of interest and the duty not to accept benefits from third parties continue to apply after resignation.
In case of breach of those duties, the remedies available for the company include: the possibility to obtain an injunction; setting aside of the transaction, restitution and account of profits; restoration of company property held by the director; damages (this is the only remedy available in case of breach of the duty of care, skill and diligence). Breach of duty may also be a ground for the termination of a contract or, for disqualification as a director.