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The Companies Act 2006 imposes a number of general duties on a director of a UK limited company. If you are a director, it is imperative that you are aware of such duties and obligations.
This guide highlights some of the fundamental duties of a director.
Key duties of a Director
- Duty to act within powers
You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.
The company’s constitution includes the company’s articles of association together with any resolutions and agreements affecting the company’s constitution, such as a shareholders agreement.
- Duty to promote the success of the Company
You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
In considering the success of the company and whether it is appropriate to take a particular course of action, the director should regard, among other matters, the following factors:
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
This duty applies to all decisions made by a director.
- Duty to exercise independent judgment
You must exercise independent judgment and make your own decisions, without subordinating you powers to the will of others.
This does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into. This also does not prevent you from relying on any advice obtained or given to you, providing that you exercise your own judgement in deciding whether or not to follow that advice.
- Duty to exercise reasonable care, skill and diligence
You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company; and
- the general knowledge, skill and experience that you actually possess.
Where a director has specialist knowledge, skill or experience, a higher standard will apply.
To exercise your powers diligently, you must keep yourself informed about the company’s affairs.
- Duty to avoid conflicts of interest
You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
This duty is not infringed if:
- the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; and
- the other directors who are genuinely independent have authorised the situation in accordance with the company’s constitution.
The duty to avoid conflicts of interest will continue to apply after you cease to be a director in relation to the exploitation of any property, information or opportunity of which you became aware of while you were a director.
- Duty not to accept benefits from third parties
You must not accept a benefit from a third party given because you are a director or because you do or do not do anything as a director.
This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.
- Duty to declare interested in proposed transaction/ arrangement
If you are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction you must do this before it is entered into. In the case of an existing transaction you must do this as soon as reasonably practicable.
However, such declaration is not required if:
- you are not aware of the interest and the interest is not a matter that you ought to have reasonably been aware of;
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest; or
- if you are the sole director of the company.
Consequences of breaching a duty
The duties imposed on directors by the CA are mandatory duties that all directors of private limited companies need to abide by, and such duties can be enforced by the company.
A company could seek an injunction against you and claim damages or compensation. Moreover, if you fail to disclose an interest in an existing transaction, you could also face the risk of a criminal fine.
The company may even see this as grounds to terminate your service contract, make a claim against you for unfair prejudice, seek to have you disqualified as a company director or pursue you for potential breach of contract.
Relief for breaches of duties
If you believe you may have breached a director’s duty, you may be able to seek relief for your breach by way of the following options:
- have the breach ratified (forgiven) by the company;
- seek relief from the court on the basis that you acted honestly and reasonably and show that that having regard to all the circumstances of the case, you ought to be fairly excused;
- the company may indemnify you for any costs incurred in defending a claim for a breach of duty, if you are successful in that claim; or
- the company has insurance for the benefit of its directors which would cover the cost of the breach.
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