Directors are in control of the day-to-day operation of companies, as well as making key decisions at board meetings. While some of these decisions are made with shareholder approval, many decisions can be made without the need for shareholder approval. Therefore, the law is necessary to provide companies with protection from potential exploitation by directors. What does the law say about directors’ duties? Paul Gordon, head of dispute resolution at Cheltenham-based solicitors Willans LLP discusses.
What does the law say about company directors’ duties?
Under the Companies Act 2006 (the “Act”), directors owe a variety of fiduciary duties to limited companies. If a director breaches any of these duties, the company can take legal action and seek appropriate remedies.
Duty to act within powers
Directors are governed by both the Act and the company’s Articles of Association. Therefore, a breach depends on the powers that are given to the director from the Articles.
If a company has the Model Articles of Association, directors are empowered to exercise all the powers of the company. This reflects the nature of the director’s role, where they are expected to be skilled and capable of making day-to-day decisions for the company.
Duty to promote the success of the company
Directors are required to act in a way that they believe promotes the success of the company, benefiting all shareholders. The Act outlines several factors that directors must consider in this regard:
- The need to foster business relationships with suppliers, customers and others.
- The impact of the decision on the community and the environment.
- The desirability of the company for maintaining a reputation for high standards of business conduct.
- The need to act fairly between the different shareholders.
While directors must take these considerations into account, they are not liable if their decisions, made in good faith, are later deemed to be poor choices – as long as they genuinely believed they were acting in the company’s best interests.
Duty to exercise independent judgment
Directors must make their own decisions, without influence from external parties. This duty ensures that directors are free to exercise their judgment based on what is best for the company.
While directors cannot simply contract out their decision-making, they are permitted and encouraged to take professional advice from solicitors and accountants who often work in tandem to ensure business is carried out compliantly.
Duty to exercise reasonable care, skill and diligence
Directors have a common law duty to act with competence and avoid carelessness.
Directors will be in breach of this duty if they have not exercised the necessary care, skill and diligence that:
Therefore, a more skilled and experienced director is held to a higher standard than a less qualified one.
Directors should always take the necessary steps to avoid breaching this duty, including seeking legal advice when appropriate, to ensure they’ve acted with the requisite care. If found in breach, directors could be liable for damages due to negligence.
Duty to avoid conflicts of interest
Directors must avoid situations where their interests’ conflict with the company’s.
This broad duty prohibits directors from exploiting company property, information, or opportunities for personal gain.
A conflict arises, for instance, if a director uses their position to take advantage of a business opportunity that the company could have pursued. If a director breaches this duty, case law assumes the breach is valid until proven otherwise. Directors are also prohibited from resigning just to seize such opportunities.
Duty not to accept benefits from third parties
Directors are prohibited from accepting gifts or benefits from third parties that could be seen as attempts to influence their decisions for the benefit of business transactions.
For example, if a director was given corporate hospitality in exchange for a more favourable deal, the director is in breach. Therefore, directors should be cautious when accepting these benefits.
Duty to declare interests in a proposed transaction
Directors must disclose the nature and extent of any personal interest they have in a proposed transaction that might conflict with the company’s interests before the company proceeds with the transaction.
This is particularly common in substantial property transactions whereby the company enters into an arrangement to sell/purchase a substantial non-cash asset from a director or connected person. In these situations, even if the directors are aware of the interest, it is good practice to declare any interests at the board meeting or by writing to the directors.
What can I do if there has been a breach of directors’ duties?
If you suspect a director of your company has acted in breach of their duties or alternatively, if your company is bringing a claim against you, seek professional help from litigation specialists to protect your interests and resolve any related disputes. Please get in touch with our experienced team for advice.
