Although I am first and foremost an employment lawyer, my first blog on Direct 2 Lawyers is going to be on a separate field – business law; specifically what duties the directors of companies owe and who those duties are owed to. This post will therefore cover the following issues:
- What is a director?
- What types of director are there?
- What duties do these directors have?
What is a director?
The board of directors of a company are the persons who are responsible for the management of the company. The directors are the persons who are members of the board. Under s.250(1) of the Companies Act 2006 the term “director” whenever used in the Act is defined to include any person occupying the position of director, whatever name they’re called. The label that’s applied is therefore not important – what’s important is the purpose and effect of your actions.
What types of director are there?
There are a number of types of director, including:
- Executive director
- Non-executive director
- De jure director
- De facto director
- Shadow director
What duties do these directors have?
Under the Companies Act 2006 directors have seven general duties:
- To act within their powers
- To promote the best interests of the company
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare an interest in a proposed transaction or arrangement
The duty to act within their powers
Under this duty a director must:
- use his powers for the exercise of a proper purpose; and
- act within the powers conferred on him by the company’s memorandum and articles of association
To promote the best interests of the company
This is probably the most important duty that the director of a company can owe. Under s.172 of the Company Act 2006 a director must act in good faith and in a way which is most likely to promote the success of the company for the benefit of the members as a whole. In doing so the director must have regard to the following (non-exhaustive) list of factors:
- the likely consequences of any decision in the long-term
- the interests of the company’s employees
- the need to act fairly as members of the company
- the impact of the company’s operations on the community and environment
To exercise independent judgment
This essentially means that the director must not fetter his own discretion and is designed to prevent directors from “contracting out” their duties to third parties.
To exercise reasonable care, skill and diligence
This duty is supposed to ensure that directors carry out their functions sufficiently carefully and skilfully. This duty may be breached if the director is found to have acted incompetently or negligently and therefore falls below the required standard of behaviour. We will cover what this precise standard is in a future post.
To avoid conflicts of interest
Under s.175 Companies Act 2006 a director must avoid a situation in which he has, or could have, a direct or indirect interest that conflicts, or possibly conflicts, with the interests of the company. This applies in particular to the exploitation of any property, information, or opportunity of the company.
Not to accept benefits from third parties
A director must not accept a benefit from a third party if this benefit is conferred because he is a director of a company or for his doing (or omitting to do) anything as a director. This duty is not breached if the director does not reasonably believe that the receipt of such a benefit would give rise to a conflict of interest.
To declare an interest in a proposed transaction or arrangement
If (under s.177 Company Act 2006) a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement within the company then he must declare the nature and extent of that interest to the other directors. This is a fairly complicated rule and will be covered in greater detail in a future post.