Directors’ duties and responsibilities
This note outlines the key duties and responsibilities of a director of a private limited company incorporated in England and Wales
Part 1: The role of a director
The board of directors is generally responsible for the day-to-day running of the company, involving taking decisions on matters such as the company’s business strategy, potential acquisitions/disposals and personnel issues.
Directors may be executive or non-executive. An executive director is usually a full or part time employee of the company who carries out specific executive functions (such as a managing director or finance director). A non-executive director is not an employee of the company or holder of an executive office. They will usually be involved in the company part time as an independent adviser or supervisor.
A director’s role will primarily be set out in the company’s articles of association (“the Articles”), their service contract or letter of appointment, or within any board resolution which appointed them.
Part 2: Directors’ duties
Directors (whether executive or non-executive) owe certain general duties to the company. These have been codified in Chapter 2 of Part 10 of the Companies Ace 2006 (“the Act”). In summary, there are seven general duties:
1. Duty to avoid conflicts of interest
Directors must avoid situations where a conflict of interest arises, whether directly or indirectly, between them and that of the company in any transactions. Just two examples of where conflicts may exist would be where:
i) A director engages a firm to carry out cleaning for the company, and that firm is owned by the director themselves.
ii) A director, for the benefit of and use by the company, acquires good or services from a business in which a personal who is connected to the director (e.g. husband, wife, sibling etc.) has an interest.
This duty is not breached if the conflict was not reasonably foreseeable or where the conflict has been authorised (by the other directors or the shareholders, and even then only where such authorisation is permitted by the Articles of the company).
Please note that the law relating to directors is complex, and the context of this note is intended as general guidance rather than comprehensive advice. It is recommended that you ensure you fully understand you obligations before becoming a director, and seek specific legal advice on your particular circumstances where appropriate.
2. Duty to act within powers
A director must act in accordance with a company’s constitution (e.g. the Articles)
In deciding whether decisions have been taken in accordance with a company’s constitution you will need to consider those taken with regard to the Articles themselves and those taken on the back of shareholder approval (resolutions).
3. Duty to promote the success of the company
This is the main overarching duty placed on a director under the Act and requires directors to promote the success of the company for the benefit of all shareholders.
The duty to promote the success for the company applies to all directors’ decisions, not just formal ones made by the whole board.
With the above in mind, s172 lays down certain matters that should be considered when deciding whether a decision does promote the success of the company, including:
i) The long-term consequences of a decision
ii) The interests of the employees
iii) The need to foster business relationships
iv) The impact of the company’s operations on the community and environment
v) The desirability of the company in maintaining a reputation for high standards
vi) The need to act fairly between shareholders
Notwithstanding this, there is no explicit definition of success in the Act but commentators have indicated that success equates to a ‘long term increase in value’ for the company.
4. Duty to exercise independent judgment
This is a general duty which extends to reliance on advice i.e. where advice is being offered, the director is expected to use their judgment as to whether to follow it or not.
5. Duty to exercise reasonable care, skill and diligence
There are two tests here – one subjective and on objective.
The director must use the care, skills and diligence that one would expect of a reasonably diligent person with:
i) The knowledge, skill and experience of a person that can be reasonably expected to carry out the director’s functions (the objective)
ii) The knowledge, skill and experience the director actually has (the subjective)
Any director will be held to the objective test, i.e. what should reasonably be expected of a director in that role at that company.
The subjective test will come into play where a director has specialist knowledge. Where this situation arises, the standard that the director will be expected to meet when making decisions will be based on their specialist knowledge.
6. Duty not to accept benefits from third parties
Directors must not accept any benefit from a third party given on account of them being a director, or in order to secure/prevent them from doing something in the course of their directorship.
Amending the company constitutions to allow benefits under a given value is common (as this would permit, for example, the director to enjoy hospitality without breaching the duty).
7. Where a director has an interest in a proposed transaction they must declare the nature and extent of that interest to the other directors. There are rules regarding how this notice must be delivered (i.e. at a meeting of the directors, or via a general or written notice).
This is not an exhaustive list of directors’ duties. As well as those general duties, a director may owe other duties to the company, such as the duty to consider or act in the interests of creditors (expressly preserved by section 172(3) and the equitable duty of confidentiality.
Furthermore, the 2006 Act imposes numerous specific responsibilities on directors, including: – Filing accounts and reports with the registrar (section 441) – Keeping a register of members (section 113) – Notifying the registrar of an allotment of shares (section 555)
Directors will have many other duties, both under the Act and under a wide variety of other laws and regulations, such as insolvency and health and safety legislation.
In particular a director must ensure that the company is not trading with a view to defrauding creditors (known as fraudulently trading) or trading with no reasonable prospect of paying its creditors (known as wrongful trading). In both instances the director may attract personal liability if these obligations are breached.
Part 3: Ongoing applicability of directors’ duties
It should be noted that the following duties will continue to apply after a person ceases to be a director:
– Duty to avoid conflicts of interest as regards the exploitation of any property, information or opportunity of which he or she became aware at a time when he or she was a director.
– Duty not to accept benefits from third parties as regards things done or omitted by him or her before he or she ceased to be a director.
Part 4: Delegation of directors’ duties
Directors may delegate some of their duties to others (such as a company secretary), but they will retain ultimate responsibility with complying with them.
Part 5: Consequences for breaching directors’ duties
In very brief terms, a failure to comply with such duties may result in personal civil and criminal liability, as well as disqualification from acting as a director. Critically it is no defence to claim ignorance towards a failure to comply.
The company may be able to offer a degree of protection against such liability by giving indemnities and taking out insurance against any liability incurred by the directors.
Note:
The law relating to directors is complex and the content of this note is intended as general guidance, rather than comprehensive advice. It is recommended that you ensure you fully understand your obligations before becoming a director and seek specific legal advice on your particular circumstances where appropriate.
BMA Law was set up by the British Medical Association, to provide specialist legal services to the healthcare sector. For more advice on the duties and responsibilities of a company director, please get in touch.