A director’s primary duty, which is held together with their fellow directors, is to manage the company for the benefit of its members. The directors may delegate some or all of their powers to particular directors (constituting a committee of the board) and/or other senior officers in the company, but they cannot delegate their duties.
The directors must ensure that suitable arrangements are in place to enable the company to meet its statutory duties and are liable to penalties if the company is in default. Directors of many companies will engage the company secretary for assistance, however, as it is the directors who are liable in the event of default, care must be taken to ensure that the company secretary is suitably qualified.
In many small private companies, the directors will often rely on their professional advisers to undertake some of their responsibilities, such as filing accounts and preparing annual returns. It is the directors and not the professional advisers who are liable, and in the event of default and prosecution it is the directors who will be called to account.
The Companies Act 2006 introduced seven duties of director. These duties, with some amendments, codified existing case law:
To act within their powers – Companies Act 2006 s.171
Directors must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred. The company’s articles of association should be consulted to ascertain the extent of a director’s powers and any limitations placed upon them.
To promote the success of the company – Companies Act 2006 s.172
A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its member as a whole, and in doing so have regard (among other matters) to:
- 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 relationship with suppliers, customers and others;
- The impact of the company’s operations on the community and the environment;
- The desirability of the company to maintain a reputation for high standards of business conduct; and
- The need to act fairly between members of the company.
To exercise reasonable care, skill and diligence – Company Act 2006 s.174
Imposed by ss.173 and 174, a director owes a duty to exercise the same standard of 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 to the person carrying out the same functions as a director in relation to the company (an objective test); and
- The general knowledge, skill and experience that the director actually has (a subjective test).
For example, a finance director would be expected to have a greater knowledge of finance issues than, say, the HR director (the objective test) but if the HR director is also a qualified accountant, then they would be expected to have a greater knowledge than would normally be expected of a HR director, although not necessarily the same knowledge as the finance director (the subjective test).
To avoid conflicts of interest – Companies Act 2006 s.175
Directors must avoid situations in which they have or might have a direct or indirect interest that conflicts, or might conflict, with the interest of the company. Of particular importance are conflicts relating to property, information or opportunity regardless of whether the company could take advantage of such opportunities.
- The duty does not apply to conflicts arising out of transaction or arrangement between the company and the director.
- Where the company is a private company, authorisation may be given by relation of the directors, provided there is nothing in the company’s articles of association that invalidated the authorisation. (s.175(5))
- Where the company is a public company, authorisation may be given by resolution of the directors, provided there is specific authority in the company’s articles of association that permits directors to authorise such transactions.
- Such authorisation, whether for a private or public company, is only valid if the necessary quorum for a meeting of the directors is present, excluding the director with the conflict of interest and without that director voting. (s.175(6))
Also Read: How to Prepare Year-end Accounts for Limited Companies
Not to accept benefits from third parties – Companies Act 2006 s.176
Directors must not accept a benefit from a third party being given by virtue of their being a director, or due to any action or inaction by the director. Benefits received by a director from a person by whom their services are provided are not to be regarded as paid by a third party. The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
To declare interests in any proposed transaction or arrangement – Companies Act 2006 s.177
A director must declare the full nature and extent of any direct or indirect interest in any proposed transaction or arrangement before that transaction or arrangement is entered into. The declaration may be given at a meeting of the directors or by general notification on appointment. (ss.184 & ss.185)
Where a previous notification or interest becomes inaccurate or incomplete, additional notification(s) must be made. Notification is not required where:
- The director is not aware of the interest or is not aware of the transaction or arrangement.
- The nature of the interest is such that it cannot reasonably be regarded as likely to give rise to a conflict of interest, to the extent that the other directors are already aware of the interest without requiring specific notification or where the transaction related to the director’s service contract.
