Under Sections 171 to 177 of the Companies Act 2006, directors owe certain statutory duties to the Company to which they are a director. If you are already a director, or intending to become one, it is critical you are aware of these duties and the potential liabilities if they are breached. These duties have been summarised below:
Duty 1: To Act Within Powers (Section 171)
a) Directors must act within the company’s constitution. This means the company’s articles of association and any binding resolutions or agreements; and
b) Directors must only exercise their powers for the purpose for which they are conferred. This means directors must not act dishonestly or use their powers to pursue an improper purpose.
Duty 2: To Promote The Success Of The Company (Section 172)
Directors are required to act in “good faith” and in a way they consider will be most likely to promote the success of the company for the benefit of its shareholders. In doing so, the director must have regard for, amongst other things:
a) the likely consequences of any decision in the long term;
b) the interests of the company's employees;
c) the need to foster the company's business relationships with suppliers, customers and others;
d) the impact of the company's operations on the community and the environment;
e) the desirability of the company maintaining a reputation for high standards of business conduct; and
f) the need to act fairly to all shareholders of the company.
Duty 3: To Exercise Independent Judgement (Section 173)
Directors must exercise their independent judgment when making decisions relating to the company. Directors may still seek and rely on third party advice provided the director exercises their own judgement on whether to follow it.
Duty 4: To Exercise Reasonable Care, Skill And Diligence (Section 174)
Directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that:
a) may be reasonably expected of a person; and
b) the director actually has.
Practically, this means specialist knowledge or experience that a director may have is take into account, and so what is considered “reasonable skill” can differ from director to director.
Directors should attend board meetings and take an active interest in the company’s affairs, ensuring that they have the necessary and relevant information in order to make a decision.
Duty 5: To Avoid Conflicts Of Interest (Section 175)
Directors must avoid situations in which they have direct or indirect interest that could conflict with the interests of the company. That applies, in particular, to the exploitation of any property, information or opportunity, or whether the interest may impact the decision making of a director.
The duty is not infringed if:
a) the situation cannot reasonably be regarded as likely to give rise to a conflict; or
b) (in certain circumstances) the matter has been authorised by the disinterested directors.
This duty continues to apply after a person ceases to be a director in relation to matters that they became aware of whilst being a director.
Duty 6: Not To Accept Benefits From Third Parties (Section 176)
A director must not accept any benefit from a third party which is offered by reason of them being director or for them undertaking any action as a director. There is no minimum threshold that a benefit must reach to fall under this duty.
Benefits received do not breach this duty if:
a) the acceptance of the benefit cannot reasonably be regarded as giving rise to a conflict of interest; or
b) the benefit is provided by the company or another director.
In practical terms, this does not mean all gifts or corporate hospitality must be turned down, but it is important to consider the following:
a) the level of the benefit;
b) the surrounding circumstances;
c) is there an expectation as to your future conduct based on receipt of the hospitality?
d) is this gift considered “the norm”?
It is recommended that a company maintains a register of benefits received and offered.
This duty continues after a person ceases to be a director in relation to anything done (or not done) whilst a director.
Duty 7: To Declare Interest In Proposed Transaction Or Arrangement With The Company (Section 177 And 182)
Under section 177, a director must ensure that they declare the nature and extent of any interest in proposed transactions or arrangements with the company. Any declaration must be made either at a directors meeting, in writing or by general notice.
No declaration is required:
a) where the director is not aware of the interest or the transaction which the conflict rises. Directors will be treated as being aware of matter to which they ought to be reasonably aware;
b) if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or
c) where the company only has one director.
Under section 182, directors must also declare interests in any existing transaction or arrangement which has been entered into by the company.
The director need not be a party to the transaction for the duty to apply. "Indirect interest" means that if, for example, a director's spouse is entering into the transaction or arrangement, the director would need to declare an indirect interest. As such, it is sensible for directors to undertake some due diligence into the interests of their connected persons.
It is a criminal offence if a director fails to comply with section 182 as this is not one of the general duties.
Duty 8: Creditor Duty
This duty is engaged:
a) On the company becoming insolvent; or
b) When the company is nearing insolvency and a director knows, or ought to know, that there is no reasonable possibility of the company avoiding insolvency.
In this event, the duty is to consider creditors' interests and balance them against members' interests where they may conflict. Circumstances may require the directors to treat creditor interests above those of the shareholders.
It is recommended to consider professional advice in cases where this duty may be applicable.
Consequences Of Breaching Director Duties
Upon breach of any of the conditions, a claim may be brought against the director by the company or by any of the shareholders on behalf of the company.
The consequences of a successful claim may include:
a) payment of damages or compensation to the company;
b) being ordered to restore the company to the position it would have been in had a particular transaction or agreement not taken place;
c) payment of costs in relation to the breach of duty;
d) transactions being voided;
e) a court injunction;
f) termination of the directorship;
g) a ban on being a director of any company in the UK for a specified time period;
h) damage to the individual’s reputation;
i) in the case of failing to declare interests in existing transactions or arrangements with the company, criminal penalties.
Potential Relief From Your Liabilities
In the event of a breach of duty, a director may be relieved from liability by:
a) the court if they feel the director acted honestly and reasonably and, considering all the circumstances of the case, they ought fairly to be excused;
b) the company but only in relation to the directors’ defence costs or liabilities arising from third party claims;
c) insurance (often referred to as D&O insurance) which may be purchased by the company to protect directors against liabilities in connection with any negligence, default, breach of duty or breach of trust in relation to the company.
The duties summarised above are not exhaustive and directors are required to follow additional regulations set out in UK legislation. If you would like further advice on any of the duties set out in this article, or the further regulations directors must adhere to, please get in touch with a member of the BPE Corporate team.
