Posted on: 02/01/2024

Category: For your business

In this three part series, we examine (1) the legal duties of directors, (2) what happens when a director is found to be in breach of their legal duties and (3) other personal liabilities of directors.

Being appointed as a director of a company comes with a list of responsibilities and liabilities, which are not always fully understood. The role requires directors to promote the success (long term increase in value) of the Company for the benefit of all of the members. In this two-part series, we have given an overview of the legal implications that go with the role.

The term director can be used quite loosely as there are a number of different types but all can be subject to the same legal control. Executive directors are normally fully involved in the running of the company and are employees. Non-executive directors are often called upon for their experience on an ad hoc basis or just to attend board meetings and are not employees. Shadow directors tend to be behind the scenes and offer direction and guidance to the directors who act on that advice. Then there are De facto directors who are not appointed to the board but perform a directors function with authority. 

Directors are also agents of the Company. They are the human face to the company that allow it to operate such as enter into contracts as re directors have the authority to bind the company. Directors are effectively in a trustee like role and as such, they must act in the utmost good faith in their dealings for and on behalf of the company and its assets. Directors who fail to do so could face personal liability for breach of their fiduciary duty.

The main seven duties of directors are set out in the Companies Act 2006 and briefly summarised are as follows:

  1. The duty to act within the powers of the Companies Constitution (Articles of Association) and only exercise their powers for the purposes for which they are conferred. This duty is more concerned with the abuse of power and the Courts will look at the motive and state of mind of those who acted to determine if a director acted for an improper reason even if within the scope of his powers. 
  2. The duty to promote the success of the Company in all their decisions. In their decision making role directors must exercise reasonable skill, care and diligence and  look at likely long term consequences, interests of employees, relationships with third parties (customers/suppliers), impact on community and environment, the company’s reputation and to act fairly towards the Companies members, such as shareholders. A reasonably detailed set of Board Minutes is recommended to show compliance with this duty. 
  3. The duty to exercise independent judgment. Directors can rely on advice but must use their own judgement as to whether to follow that advice and should not be swayed by the interests of others. 
  4. The duty to exercise reasonable care skill and diligence. This is judged according to the level of knowledge skill and experience that might be expected of a director and that which they actually have, which might be a higher standard. It is also a proactive role as directors are expected to be competent and keep themselves informed and up to date with the Companies affairs and actions of fellow directors. 
  5. The duty to avoid conflicts of interest. A director must avoid putting themselves in a position where there is a conflict between their own personal position and those of the company. This particularly applies to property, information or opportunity and is a continuing obligation applying after a directorship comes to an end. Any board authorisation must not include the director who has a conflict. 
  6. The duty not to accept benefits from third parties. Directors must not accept benefits from any third party, which is given due to being a director. The Articles can be drafted to allow certain benefits to not infringe this rule such as corporate hospitality and shareholders can authorise benefits in advance.
  7. The duty to declare an interest in a proposed transaction. Where directors are in any way directly or indirectly interested in a proposed transaction they must declare such interest to the other directors. This applies to interests that might be held by connected persons (such family members). The impact of declaring an interest will be set out in the Articles. 

Further help on the roles and responsibilities of directors can be found at Companies House and BEIS or in online guidance notes such as those produced by The Chartered Governance Institute.