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.
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:
i. 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
ii. 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)
iii. 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 they are:
- to act only within the powers conferred upon the Director by the company’s constitution (ie the Memorandum of Association and the Articles of association) (section 171)
- to promote the success of the company, which involves the Director acting in good faith and following best practice with regard to business transactions and the impact on the environment and community. (section 172)
- to exercise independent judgement (section 173)
- to manage the company with reasonable care, skill and diligence (section 174)
- to avoid direct or indirect conflicts of interest (section175)
- to refrain from accepting gifts from others (section 176)
- to declare any personal interest in proposed transactions and/or company business, be they direct or indirect personal interests. (section 177)
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 consequence a director can face for not comply 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.
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. In order to demonstrate such compliance, directors should:
- keep up-to-date accounting records and reports
- prepare a Director’s Report providing information on the affairs of the company
- keep Minutes of board meetings to record decision-making. This helps ensure the director thinks about their duties when making decisions on behalf of the company
- follow the proper procedure
Written by Ken Radley-Davies, Associate Legal Executive, Dispute Resolution and Commercial Litigation
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