Overview of Directors' Duties
Directors play a crucial role in managing the day-to-day operations of a company, acting as its agents and bearing numerous responsibilities. These duties, derived from both common law and statutory provisions, are essential for ensuring that directors act in the best interests of the company. Here, we explore the fundamental duties of directors as codified in the Companies Act 2006 (CA 2006), and provide insights into protecting directors from liability in case of breaches.
Key Duties of Directors under the Companies Act 2006
Duty to Act Within Powers: Directors must act in accordance with the company’s constitution and exercise their powers for the purposes for which they were conferred. (CA 2006, s 171)
Duty to Promote the Success of the Company: Directors should act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. (CA 2006, s 172)
Duty to Exercise Independent Judgment: Directors must exercise their own judgment and not merely follow the instructions of others. (CA 2006, s 173)
Duty to Exercise Reasonable Care, Skill, and Diligence: This duty is measured both objectively (what would be expected of a person in their position) and subjectively (what they personally bring in terms of skill and experience). (CA 2006, s 174)
Duty to Avoid Conflicts of Interest: Directors must avoid situations where their interests conflict, or could conflict, with those of the company. ( CA 2006, s 175)
Duty Not to Accept Benefits from Third Parties: Directors should not accept benefits from third parties that could potentially conflict with their duties to the company. (CA 2006, s 176)
Duty to Declare Interest in Proposed Transactions or Arrangements: Directors must declare any direct or indirect interest they have in proposed transactions or arrangements with the company. (CA 2006, s 177)
Additional Duties and Liabilities Directors’ Duties and Protection from Liability
Beyond the statutory duties outlined in the CA 2006, directors should also be mindful of other responsibilities that may arise under various legislations and common law:
Insolvency Situations: Directors may face liabilities for fraudulent trading, wrongful trading, and transactions carried out at an undervalue during insolvency. (Insolvency Act 1986, ss 213, 214, 238, 239)
Environmental Legislation: Directors can be held liable for offences committed with their consent, connivance, or neglect. (Environmental Protection Act 1990, s 157)
Sector-Specific Regulations: Directors must comply with secondary legislation and sector-specific regulations, such as those related to unsolicited marketing communications. (Privacy and Electronic Communications (EC Directive) Regulations 2003, SI 2003/2426)
Listed Companies and AIM Rules: Directors of listed or AIM companies must adhere to additional rules and guidelines from entities like the FCA and the UK Corporate Governance Code.
Enforcement and Breach of Duties
The general duties of directors are enforceable in the same manner as other fiduciary duties. If a director breaches any of these duties, the company itself is primarily responsible for enforcing them. Actions can be taken by the board or, in certain situations, by shareholders through derivative claims.
Civil Action and Disqualification: The company can pursue civil action against a director for breach of duty, potentially leading to disqualification if deemed unfit for management. (Company Directors Disqualification Act 1986)
Derivative Claims: Shareholders can bring derivative claims on behalf of the company against directors for breach of duty. (CA 2006, ss 260–264)
Consequences of Breaching Duties
Breaching directors' duties can result in significant consequences, including:
Damages or Compensation: Directors may be required to compensate the company for any losses incurred.
Restoration of Property: Directors might need to restore any property or profits wrongly taken from the company.
Account of Profits: Directors may have to account for any profits made from the breach.
Rescission of Contracts: Contracts entered into in breach of duties may be rescinded.
Protecting Directors from Liability
While directors face stringent duties, there are several ways to protect them from liability:
Insurance: Directors can be protected by insurance policies that cover liabilities arising from negligence, breach of duty, or breach of trust. (CA 2006, ss 232, 233)
Indemnity: Companies may indemnify directors against certain liabilities, provided it complies with statutory provisions. (CA 2006, ss 232–238)
Ratification by the Company: Shareholders can ratify certain breaches of duty, absolving directors from liability. (CA 2006, s 239)
Court Relief: Directors may seek relief from the courts if they acted honestly and reasonably. (CA 2006, s 1157)
Funding for Defense: Companies can provide funding for directors to cover the costs of legal defense or court applications for relief. (CA 2006, ss 205, 206)
Charity Commission Authorisation: For charitable companies, the Charity Commission can authorise acts that involve breaching duties.(CA 2006, s 181)
Post-Directorship Duties
Certain duties continue to apply even after a director has ceased to be in office:
Duty to Avoid Conflicts of Interest: This duty remains relevant concerning the exploitation of any property, information, or opportunity that a director became aware of while in office. (CA 2006, ss 170(2)(a), 175)
Duty Not to Accept Benefits from Third Parties: This duty also continues post-directorship in relation to acts done while in office. (CA 2006, ss 170(2)(b), 176)
Interpretation and Application of General Duties
The CA 2006 was not intended to change the law regarding directors' duties fundamentally. The general duties are considered a codification of existing common law rules and equitable principles, which remain relevant for interpreting and applying these duties. The duties must be interpreted in accordance with common law and equitable principles, ensuring a consistent approach to directors' responsibilities. (CA 2006, ss 170(3), 170(4), 179, 180, 181)
Understanding and adhering to directors' duties is fundamental to good corporate governance and the protection of the company's interests. Directors must be aware of the broad scope of their responsibilities, including those arising under various legislations, and take proactive steps to comply with them. Equally important is the provision of adequate protection mechanisms for directors to ensure they can perform their roles effectively and without undue fear of personal liability.
At CCS Law, we offer comprehensive legal advice and services to help directors navigate their responsibilities and safeguard their positions. Our expertise covers all aspects of directors’ duties and the protections available to them under the CA 2006 and other relevant legislations. For more detailed guidance and support, please contact us directly.
Disclaimer: This article is intended for informational purposes only and does not constitute legal advice.