Directors’ duties are a requirement introduced by the Companies Act 2006 which imposes general duties to a director of a limited company.
Your general duties are owed to the company which you are a director of and not to other group companies or individual shareholders. A breach of a general duty typically gives the company a number of potential remedies including an injunction, damages or compensation. Failure to disclose an interest in an existing transaction or arrangement with the company also carries the risk of a criminal fine.
If a director finds they have acted in a way which breaches the general duties owed to the company, the following help may be available:
- in certain circumstances the breach may be ratified by resolution of the company’s shareholders
- in certain circumstances the court may grant relief if the director acted honestly and reasonably
- the company may have arranged insurance for the benefit of its directors
- the company may offer to assist the director by indemnifying him or her against costs incurred in successfully defending a claim for breach of duties owed to the company.
- the unsuccessful defence of or fines imposed in criminal proceedings
- penalties imposed by regulatory bodies.
It is common for a company to take out directors’ and officers’ (D&O) insurance on behalf of its directors. Policy covers and terms vary but typically deal with directors’ liabilities arising from claims of negligence, breach of duty or other default.
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What are your responsibilities as a director?
1. Act within powers
You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.
2. Promote the success of the company
You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. When considering what is most likely to promote the success of the company, the legislation states that a director must have regard to:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company.
Other relevant factors should also be properly considered.
3. Exercise independent judgment
You must exercise independent judgment and make your own decisions.
4. Exercise reasonable care, skill and diligence
You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
- the general knowledge, skill and experience that you actually possess.
The expected standard is measured against both objective and subjective yardsticks. A directors actual understanding and abilities may not be enough if more could reasonably be expected of someone in his or her position.
5. Avoid conflicts of interest (a “conflict situation”)
You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
This duty is not infringed if:
- the situation you are in cannot reasonably be regarded as likely to give rise to a conflict of interest. On a proper analysis of the circumstances, consider whether there will actually be a conflict or potential for conflict with the interests of the company
- the situation has been pre-authorised. Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.
6. Not accept benefits from third parties
You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.
This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. Declare interests in proposed or existing transactions or arrangements with the company
If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction, you must do this before it is entered into. In the case of an existing transaction, you must do this as soon as reasonably practicable. This duty is not infringed if:
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest
- an interest has not been declared because you are unaware that you have the interest, or the other directors are already (or ought reasonably to be) aware of it.
Your general duties are owed to the company which you are a director of and no other group companies or individual shareholders. A breach of a general duty typically gives the company a number of potential remedies including an injunction, damages or compensation. Failure to disclose an interest in an existing transaction or arrangement with the company also carries the risk of a criminal fine.
