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What are my duties as a director?
If you are a director of a limited company in the UK, then you owe a wide range of duties to that company. Breaches of duty can give rise to personal liability and, in some cases, criminal sanctions so a proper understanding of your duties and responsibilities is essential.
Often, a director will be ignorant of his or her responsibilities (or some of them). Sometimes, a director will also be a shareholder and/or employee of the company and this can lead to confusion as to how the director is to exercise his or her powers. Both of these situations can lead to serious problems if they result in breaches of the director’s duties, whether those breaches are deliberate or not.
What types of director are there?
Some employees have a job title which includes the word ‘director’, but have not been appointed as a director at Companies House. Conversely, some statutory directors may occupy a job role within a business which is called something entirely different. Still further, occasionally a person will as a matter of fact be a ‘shadow director’ – neither called nor appointed as a director, but exercising equivalent influence over the Company.
- A
de jure director is one who has been validly appointed by the company. - A
de facto director is one who, though never actually or validly appointed, assumes the role of a director. - A
shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act, though they have never been appointed (and may not even be an employee of the company).
The question as to which type of director you are can become complicated, and if you are unsure then you should take advice. Ultimately though, if you assume a role within a company which is equivalent to that of a director, or are accustomed to giving instructions as to its management, you are likely to owe the duties which are summarised here.
What are the duties?
The Companies Act 2006 (‘the Act’) sets out the general duties of a director. They are set out below, with brief examples:
- To act within powers
A director must act in accordance with the company’s constitution (broadly, its articles of association, decisions which have been made in accordance with those articles or any other resolutions or agreements which the company has made), and must only exercise powers for the purpose for which they were conferred – this will cover instances where, for example, a director abuses his or her power by doing something which may be within the scope of their power, but has an improper purpose (such as fraud).
- To promote the success of the company
This is founded on the fiduciary duty to act in good faith and in the company’s best interests, and essentially means that a director must act in a way he or she thinks is most likely to promote the success of the company for the benefit of its members (shareholders) as a whole.
In making decisions, a director must therefore have regard to, amongst other things: likely long-term consequences; the interests of employees; and fairness as between shareholders. There is no exhaustive list of the factors which a director must consider as part of this duty, and so a director will be expected to exercise a degree of judgment and discretion.
One important modification to this duty is where a company is insolvent, or is nearing insolvency – in those circumstances a director will be under a duty to have regard to the interests of the company’s creditors. Given the ease with which the interests of the shareholders might conflict with those of creditors, directors must be particularly careful where a company is experiencing difficulties.
- To exercise independent judgment
A director must not allow himself to be influenced by others in making decisions. For example, a director must not accept instructions from a third party (such as a shareholder) to vote in a certain way on decisions affecting the company.
Sometimes the company may have entered into an agreement which has the effect of imposing a restriction on a director’s discretion in decision-making. Whether complying with an agreement like that would represent a breach of duty is a question of fact and will vary from case to case – in those circumstances a director ought to seek professional advice.
- To exercise reasonable care, skill and diligence
- The general knowledge, skill and experience that may be reasonably 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
- To avoid conflicts of interest
As a director you must avoid situations in which you have, or could have, an interest which conflicts, or could conflict, with the interests of the company. This is one of the more commonly-seen complaints regarding directors’ conduct.
- Multiple directorships – such as a directorship of a major shareholder, competitor or supplier;
- Personal interests – you are a major shareholder, or you own property near to the company’s property;
- Advisory positions – you provide advisory services to the company or to a competitor (such as accountancy advice);
- You make use of the company’s property, information or opportunities in order to derive a direct profit or benefit personally;
- Connected persons – any of the above applies to a person connected to you, such as a spouse or family member
- Not to accept benefits from third parties
A director must not accept any benefit from a third party which is given because he or she is a director, or is given in return for doing (or not doing) something as a director.
‘Benefit’ is not a defined term but would obviously include a bribe and it is important that directors are familiar with the provisions of relevant legislation such as the Bribery Act 2010.
- To declare interests in proposed or existing transactions
A director must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. A director does not need to be a party to the transaction or arrangement for this duty to apply, and should bear in mind any indirect interest they may have via a connected person (such as a family member) – in practice this might mean that some due diligence as to the interests of connected persons may be required.
- An action for damages
- Injunctive relief
- Setting aside of transactions, restitution and an account of profits
- Restoration of company property held by a director
- Criminal prosecution and fine (or, rarely, imprisonment)
As a director, you must exercise the same care and skill which would be exercised by a reasonably diligent person with both:
A higher standard is therefore imposed on a director who has specialist knowledge (such as a professional qualification or equivalent experience).
Issues frequently arise where a person takes on a directorship without being sufficiently qualified or experienced to fulfil the functions which are to be required of them, and this frequently ties-in with a failure to exercise independent judgment as described above.
There is no exhaustive list of situations which could give rise to a conflict of interest, but the following are some of the more obvious or common examples:
It may be possible for conflicts to be pre-authorised or otherwise approved by the company but a director who finds himself in a possible conflict position should seek advice at an early stage.
Who are the duties owed to?
Directors owe their duties to the company, not generally to the shareholders or creditors (subject as above to insolvency situations), and not to any particular shareholder – the nature of the duties means that if a director exercises them purely or primarily in the interests of a particular shareholder or class of shareholder, then they risk being in breach of their obligations.
Generally, it is the company itself as a legal entity which will be entitled to enforce a director’s duties, or to seek relief from any breach of those duties.
As ever, there are exceptions to the general rules and in some circumstances a shareholder or group of shareholders may be able to bring a derivative action against a director on behalf of the company. Further, it may in some cases be that a director, due to a particular set of facts or circumstances, owes separate obligations to shareholders which are not necessarily connected with the duties set out in the Act.
What are the sanctions for breach of duty?
This will depend on what exactly a director has done (or failed to do), but broadly a director who has acted in breach of duty might face the following consequences, in their personal capacity:
A breach of duty may also, obviously, give grounds for termination of a director’s service contract (which might, depending on the company’s constitution, have a knock-on effect for directors who are also shareholders), or for disqualification as a director under the Company Directors Disqualification Act 1986.
Advice
This is intended only as a general guide to the fundamental statutory duties which a company director owes and is not exhaustive. Prosecution of actions against directors in their personal capacities is not uncommon, particularly where a director’s conduct has caused or contributed to financial difficulty or insolvency.
It is imperative that anyone acting as a director properly understands his or her obligations and, where a breach has occurred, seeks advice as to how the matter might be handled or whether any remedies might be available.
We have a wealth of experience in dealing with issues arising from the relationship between a business, its directors and its shareholders – if you have any queries or concerns in relation to any aspect of that relationship we will be pleased to discuss them with you.