The Companies Act 2006 set out in Part 10 chapter 2 ‘General duties of Directors’. These place a fiduciary duty and duty of care and skill on all statutory Directors of a company. The general duties can be found under sections 171 to 177 of the Companies Act 2006 and must be adhered to.
The fiduciary duty owed by a Director to the company is one of ‘trust’. Directors are required to act in the best interests of the company, in good faith and honesty.
A Director is required to act with a certain level of care and skill when performing their role as Director. To assess whether a Director has exercised care, skill and diligence in office would be whether a reasonably diligent person would have acted in the same way. The reasonably diligent person would be considered to have:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the Director in relation to the company, and
- the general knowledge, skill and experience that the Director has (i.e. a subjective assessment based on the Director’s specialist knowledge, skill and experience), and
- the majority of a Director’s duties are fiduciary.
Statutory duties
The statutory duties are set out at sections 171 to 177 of the Companies Act 2006 as per the below:
- Section 171 – Directors have a duty to act within their powers in the company’s Constitution and should only use those powers for the purposes for which they are conferred
- Section 172 – Directors have a duty to promote the success of the company and to act in good faith for the benefit of the members. Directors must follow best practice with regard to business transactions and the impact on the environment and community
- Section 173 – Directors must exercise independent judgement
- Section 174 – Directors must manage the company with reasonable care, skill and diligence
- Section 175 – Directors must avoid direct or indirect conflicts of interest
- Section 176 – Directors must refrain from accepting gifts from third parties
- Section 177 – Directors must declare any personal interest in proposed transactions and/or company business, be they direct or indirect personal interests
- Under Section 441 Directors have a duty to file accounts and reports with the registrar at Companies House every year.
To whom does a Director owe a fiduciary duty?
A Director’s fiduciary duty is first and foremost owed to the company of which they are a Director. In certain circumstances, a Director’s duty can also require them to act in the best interest of other interested parties (e.g. employees and creditors).
What are the consequences of not complying with the Directors’ duties?
There are various consequences a director can face for not complying with their duties, including, but not limited to:
- the Director can be personally liable to reimburse the company for any loss or damage it has suffered,
- the Director being held personally or criminally liable should they be involved in any wrongful activity (e.g. bribery or fraudulent trading),
- the Director’s services contract being terminated,
- the Director being disqualified from acting as a Director.
The penalties for non-compliance of these duties could be a fine and disqualification as a director. If the breach is serious and criminal proceedings are taken against the director, the penalties could include fines and imprisonment.
Who can bring a claim for breach of the duties?
It is typically the company which can make a claim against a Director, as the prime duty owed by a Director is to the company.
The Board of Directors is usually the party to bring an action for breach of a Director’s duty or, where the company is insolvent, a liquidator.
Shareholders have a limited right to bring a claim, known as a derivative claim or derivative action. Such a claim may be brought if the Board of Directors is unwilling, or unable, to act against one or more fellow Directors in breach of their duties.
Director’s protection
The Companies Act 2006 prohibits Directors from being exempt or indemnified against liabilities in connection with any negligence, default, breach of duty or breach of trust. However, in the event of a breach of the Directors’ duties, Directors can be protected by:
- insurance cover,
- an indemnity,
- ratification by the company – it should be noted that some acts cannot be ratified (e.g. dishonest or unlawful acts on the part of a Director),
- obtaining relief from the court for the breach of duty,
While acting as a Company Director, Directors should take care to ensure that they comply with their duties.
If you need any advice on whether you are adhering to your Directors duties or feel someone is in breach, please contact Courtney Stephenson for more details., Dispute Resolution and Commercial Litigation
