Directors Duties to a Company under the Companies Act 2006

Date Added 28.07.15

Please note that this article should not be relied upon for the provision of, or as a substitute for, legal advice.

The Companies Act 2006 imposes several duties on company directors. Please note that there are several other duties not discussed in this article which are also imposed on directors, either under different legislation, common law principles which have been developed by the courts over time or otherwise provided for in a company’s articles of association.

Duties

The seven general duties specified in the Companies Act 2006 are as follows:

  • Duty to act within powers – a director must act within the powers permitted in the company’s articles of association or otherwise approved by the company’s members;
  • Duty to promote the success of the Company – a director must act in a way which he believes will most likely promote the success of the company for the benefit of all its shareholders. There are several factors which a director must consider in this regard.
  • Duty to exercise independent judgement – a director must make his own decisions and should not follow another person’s directions unless they agree with it;
  • Duty to exercise reasonable care, skill and diligence – this is judged against both the actual knowledge, skill and experience of the director concerned and also against the standard reasonably expected of a director carrying out his functions;
  • Duty to avoid conflicts of interest – a director must avoid a situation where his duties to the company are conflicted with any other interests or duties he owes to a third party (unless otherwise authorised by the company);
  • Duty not to accept benefits from third parties – a director must not accept any benefit which is given because of his office as director or in consequence of him doing or not doing anything as a director; and
  • Duty to declare interests – a director must declare his interest in any proposed transaction or arrangement with the company.

Who are duties owed to?

A director’s duties are owed to the company (and not to the shareholders of the company). Therefore, only the company is able to bring a claim and enforce the duties against a director, although it is possible for shareholders to bring a claim on behalf of the company in certain circumstances.

Cumulative duties

If more than one duty applies at any given time, the director must comply with each duty. Similarly, the duties do not require or authorise a director in the performance of his duties to breach any other law or duty. For example, a director cannot act outside of his powers on the basis that it is the best way to promote the success of the company.

Independent of other directorships

If a person is a director of more than one company, then the director will owe duties to each company independently. Again, one duty to one company will not extinguish or override a separate duty to another company.

Duration

Most of the duties only apply during the period in which the director is in office. However, the duty to avoid conflicts of interest (e.g. using confidential information obtained whilst a director) and a duty not to accept benefits from third parties will continue to apply after a person ceases to be a director.

Ratification

A company (acting by its shareholders) can approve the conduct of a director, including breach of some duties, provided that the shareholder’s approval is obtained without the director concerned (or his/her family members) taking part in the vote.

Otherwise, the courts may ratify a director’s actions if it decides that a director has acted both honestly and reasonably. A director can apply to court for this relief if he has reason to expect a claim to be made against him.

Consequences of breach

Upon a breach of duty, a claim can be brought against the director personally. Furthermore, whilst a shareholder’s liability is limited, a director’s liability is not limited. This means that a director’s personal assets are potentially at risk.

Remedies

The remedy for breach of duty is usually compensation by payment of damages. Alternative remedies also include an injunction against the director, a transaction being void, or the director having to account to the company for any profits or property received.

Indemnity and insurance

A company cannot indemnify a director for breach of duty or negligence. However, a company can reimburse a director for any costs incurred by a director in defending any claim or any costs incurred for making an application for relief from the courts. If the defence or application is unsuccessful, the director must repay the company.

A company can, however, purchase insurance for its directors against any liability suffered in connection with any negligence or breach of duty.

Who can help me?

Talk to Tollers! Our Corporate and Dispute Resolution teams can give you all the assistance and guidance you need, whether this is advising on bringing or defending any claim, or alternatively providing advice on director’s duties in specific circumstances or generally. Get in touch today.

If you require advice on director’s duties to a company, Talk to Tollers contact 01908 396230

Please note that this article should not be relied upon for the provision of, or as a substitute for, legal advice.

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