A Guide to Directors Duties
Companies can be simple, small micro businesses or complex organisations with many thousands of employees. It is easy to appreciate that such organisations are difficult to control and keep running smoothly. This article looks to explore the duties of the people who are tasked with the day to day running of companies – directors. These are the key decision makers in any company, instrumental to any corporate organism’s success. While no two director’s roles are identical, their duties are legally codified. The Companies Act 2006 prescribes said duties, ensuring that all companies are run ethically and properly.
Duty to act within the extent of their powers (s 171):
A director’s powers are limited to those that are assigned to them by the company’s Articles of Association, an important document that forms part of the company’s constitution. The articles can also restrict to directors’ powers, such as limiting the power to enter contracts based on the financial obligations attached to them. It is important for any director to thoroughly familiarise themselves with their company’s articles of association as this may limit their scope and remit.
Duty to promote the success of the company (s 172):
It would be forgivable to assume that all directors would take this duty as read. This duty serves as protection for shareholders, promoting transparency and ethical conduct. From 2019, companies with more than 250 employees have had to include in annual reports how this duty has been met.
Duty to exercise independent judgement (s 173):
Directors should not be directly influenced by third parties when making decisions on behalf of their company. Such third party would not be liable for any wrongdoing and are not bound by the same ethically responsibility a director owes to the company. This does not mean that a director cannot seek advice, merely that the ultimate decision should be made by them individually, based on the information they have gathered.
Duty to exercise reasonable care, skill and diligence (s 174):
While directors are not assumed to be experts on every aspect or issue that presents itself as part of their role, they must act as any other reasonably diligent person would in the same situation. This is subject to an objective test – does the directors actions match those of a person with reasonable levels of knowledge, skill and experience – and a subjective test – was the director’s action the same as what might be expected given the directors actual level of knowledge, skill and experience. A director should apply the level set out by the objective test at a minimum but where they happen to have relevant specialist knowledge the subjective standard should be met as well.
Duty to avoid conflicts of interest (s 175):
A director must avoid any and all situations he or she might enter into in which his or her own interests do not align with those of the company. This is particularly relevant to transaction which include company property, information or opportunity. This ties into the aforementioned duty to promote the success of the company – a director cannot be doing so if he is acting to serve his own interests. Conflicted directors can still act if the company’s articles of association and relevant approvals are obtained.
Duty not to accept benefits from third parties (s 176):
This rule seeks to imposes restrictions on directors looking to exploit their position for personal benefit. Essentially, this duty means that directors must not accept benefits from a third party which is conferred as a result of their action/non-action. This is especially relevant where a director is accused of taking bribes. A company may include a value in their constitutions or internal policies to allow minor personal benefits.
Duty to declare interest in proposed transactions or arrangements with the company (s 177):
Where a director is in any way interested in a proposed transaction or arrangement the company intends to enter into, they must declare to the other directors the full nature of their interest. Unless otherwise approved by the company, an interested director should not act in respect to the relevant transaction or arrangement. There is no need for a declaration where the director is unaware of the interest or if the company has only one director. The same is true if the interest cannot be reasonably regarded as being likely to give rise to a conflict of interest (s 177(6)(a)).
Conclusion:
These are only a small handful of duties a company will expect a director to perform. In reality there are numerous other duties, some of which will depend upon on the type of business a company carries out. Directors should always bear their duties in mind – malpractice can result in personal liability, criminal proceedings and disqualification from severing as a director. These core duties represent what is expected of all directors, though it is prudent to carefully review a company’s articles of association to check if there is any departure from these rules.
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