Our commercial solicitors advise directors who are unclear or concerned about their duties and possible liabilities in specific situations and also shareholders and companies who suspect that a director may be acting in breach of duty.
Whilst statutory Company law does set out a list of directors duties, companies and directors are well advised to clarify expectations via a director service contract and, where a director is also a shareholder via a shareholder agreement.
Restrictions on what directors are legally entitled to do can also be included in the company’s articles of association. Notwithstanding all these protections, practical protections and communication and information are also important to avoid problems or breaches of director duties.
Alongside the statutory duties there is what is known as the ‘code of conduct’ for directors. The code sets out further principles which need to be at the forefront of directors thinking.
We have considerable experience both in terms of the practical applications of the principles below and our litigation lawyers can also advise on potential breaches of duties and as regards the various remedies available, so please get in touch.
There are various statutory duties which directors must be made aware of. In addition to this, the Company, which is a separate legal entity, has additional responsibilities which the directors are responsible for ensuring that the company complies with them. The Companies Act 2006 (Act) sets out the main duties of a director.
It is important to note that the directors statutory duties set out in the Act do not cover all the duties that a director may owe to the company, they provide a framework consistent with the position that directors are in an important, trusted position to run a company in a professional and ethical way.
As can be seen below, there are a number of principles, and many of these are common sense and there will be situations where, whether as a director making a decision, a co-director concerned about another director’s actions or as shareholder concerned for the same reasons, it will be clear whether a particular action is acceptable or not. In other situations, the position is not so clear cut, and legal advice should be taken.
In the event that concerns have reached a point where action needs to be taken, litigation advice may be required.
The directors’ statutory duties fall under seven headings
To act within the powers
This codifies the directors’ duty to comply with the company’s constitution which includes the articles of association, which are in effect the internal rules for the company
To promote the success of the company
This requires a director, in good faith, to act in a way which would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole, so as not to advantage just one or a few shareholders.
To exercise independent judgment
Directors must exercise their powers independently.
To exercise reasonable care, skill and diligence
This is an objective standard. The standard of competence now expected of all directors will be that currently expected of a director with the expertise and experience of the director in question. In other words, if a director is highly experienced, and for example, sits on many company boards, he or she will be expected to act to a higher standard than a director of a small family owned company.
To avoid conflicts of interest
Directors will have to avoid situations where either there is or may be a conflict between the interest of the company and that of the director.
Duty no to accept benefits from third parties
This prohibits the directors from exploiting their position for any personal benefits. It also prohibits the acceptance of benefits (including bribes).
Duty to declare interest in the proposed transaction or arrangement
Unless the acquisition of a potential interest has been authorised by the members of the company, the directors cannot join interest in any proposed transaction or arrangement which involve the company. This was a position under the Companies Act 1985. The Act now requires a director to disclose any proposed interest that he may join in any proposed transaction.
If you need advice on director legal duties please get in touch with me – this is an area where I regularly advise clients.