Do you know your Duties as Director?

Do you know your Duties as Director? image

By: Sam Glascow, Trainee Solicitor in the Commercial and Agricultural Department, Farnfields Solicitors

Does this apply to me?

Directors’ general duties are owed by all types of directors which includes formally appointed directors, shadow directors, executive and non-executive directors etc.

It is important to note that you can be a director even if you are not officially appointed or have a different job title. One example is a de facto director who is someone who acts as a director and performs the functions of a director but has not been officially appointed as such. Despite lacking a formal appointment, their actions and responsibilities within the company are equivalent to those of a director.

Therefore, it is important to check your ‘role’ within the company. Are you performing functions which are similar to that of a director? You will be a director if you are occupying the ‘position’ of a director, irrespective of job title.

To whom do I owe the duty?

 It is important to know who may be able to enforce the duties against you. Generally, directors’ duties are owed to the company itself rather than the shareholders of the company.

When a company is close to going insolvent, directors must consider and, if needed, prioritise the interests of the company’s creditors. This responsibility is to the company, not directly to the creditors.

What are my general duties?

 There are seven general duties, and most of them involve acting in the best interests of the company and its stakeholders.

1 Duty to act within powers (s.171 CA 2006)

This involves acting in accordance with the company’s constitution, including articles, resolution agreements and company decisions.

2 Duty to promote the success of the company (for the benefit of members as a whole) (s.172 CA 2006)

Directors must act in good faith and consider long-term consequences of decisions, the reputation of the company and acting fairly.

3 Duty to exercise independent judgement (s.173 CA 2006)

This does not mean directors cannot take advice. It means directors must exercise independent judgement in deciding whether or not to follow advice given for the betterment of the company.

4 Duty to exercise reasonable care, skill and diligence (s.174 CA 2006)

This stems from directors’ common law duty of care. If you have a particular expertise in a field, for example accounting, you will be expected to demonstrate a greater degree of knowledge, skill and care in this area than the average person.

5 Duty to avoid conflicts of interest (s.175 CA 2006)

Directors must avoid situations where there is a direct or indirect conflict of interest with the company.

6 Duty to not accept benefit from third parties (s.176 CA 2006)

This is to ensure that directors are not exploiting their position as director for their person benefit.

7 Duty to declare interest in proposed transactions or arrangements with the company (s.177 CA 2006)

Full and frank disclosure of a director’s direct or indirect interest in a proposed transaction of the company is required. This again ensures that directors do not make any personal gain from company transactions.

Checking your company’s constitution

 It is important that you check your company’s constitution, including the articles of association and any shareholders’ agreement. There may be further provisions either extending or limiting the duties you owe.

In the event that you breach your duty – consequences

 Action may be taken primarily by the company, but also by shareholders and liquidators in certain situations.

These parties may seek to recover financial compensation and equitable compensation, such as injunctions, restoration of company’s property and account of profits. Breaches of duty can also form part of the case for disqualification under the Company Directors Disqualification Act 1986.

It is clear that breach of directors’ duties can be disastrous for the heath of your company, as the remedies that can be sought are often costly and may lead to your disqualification as director.

 What can I do?

If there is a claim against you for breach of your director duties, it is important that you can demonstrate that you have acted honestly and in good faith.

A company may ratify (forgive) breaches of duty under the Companies Act 2006.

The court may grant relief if it considers that a director has acted honestly and reasonably and has had regard to all the circumstances of the case. It is important to show that you have acted in good faith.

While exemption and indemnity is not generally applicable under the Companies Act 2006, it may be worthwhile for companies to purchase insurance for its directors against any liability in relation to breach of duty.

If you have any questions regarding your duties as director or your company as a whole, please do not hesitate to get in touch with Sam in the Commercial and Agricultural department.

 

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