Directors duties – understanding your responsibilities as a Company Director

7 Minutes

Being appointed a company director or becoming a director by launching a start-up company comes with considerable responsibility. Codified in sections 170-177 of the Companies Act 2006, directors’ duties apply to all directors of a limited liability company and if breached, you can be personally liable.

What are the directors’ duties under the Companies Act 2006?

You must act per the company’s constitution which can include its Articles, resolutions, and any agreements. As a company director, you can only exercise your powers for the purposes for which they are given.

You must act in good faith and promote the success of the company. However, if the company is insolvent or about to become insolvent, this duty changes to protecting the interest of the company’s creditors.

You must exercise independent judgment. Although you can take advice, the ultimate decision on issues must be yours alone.

You are required to exercise reasonable care, skill, and due diligence when undertaking your responsibilities.

You must not place yourself in a position where there is a conflict, or possible conflict, between the duties you owe to the company and your personal interests or duties owed to a third party.

You cannot accept any benefits which are bestowed on you thanks to your position as a company director. Although the meaning of the word ‘benefit’ is not specified in the Companies Act 2006 it has been defined by the OECD as a favourable or helpful factor, circumstance, advantage, or profit.

If you have an interest in a proposed transaction or arrangement the company plans to take advantage of, this must be declared to the other directors.

Who can bring a claim for breach of directors’ duties?

Directors owe a duty to the company, therefore only the company can bring a civil claim for breach. However, shareholders and fellow directors can bring a claim on behalf of the company. Creditors can pursue a claim if the company falls into insolvency and you, as a director, failed to act in their best interests.

What are the penalties for breaching directors’ duties?

The penalties for breaching directors’ duties are wide-ranging. These can vary from the termination of your position to disqualification under section 6 of the Company Directors Disqualification Act 1986.

If you are found to have breached your duty to exercise reasonable care, skill, and diligence, the remedy available is damages. If one of the other fiduciary duties is breached, the company can:

• Ask the court to order an injunction.
• Have the transaction connected with the breach set aside or restored and order an account of profits and/or ask for restoration of the company’s property.
• Seek equitable compensation (although this is a developing area of law).

Is there any other legislation that provides for directors’ duties?

The aforementioned duties under the Companies Act 2006 are known as the ‘general duties’. Other legislation that imposes fiduciary duties on a company director include:

• The Health and Safety at Work etc Act 1974 – directors have a duty to protect employees and any others (for example members of the public) that may be harmed due to the work practices of their company.

• The Insolvency Act 1986 – directors have several duties, including notifying the monitor of insolvency proceedings, for example, making an administration application in respect of the company.

• Environmental law – directors can be held personally liable for breaches of environmental law, for example, water pollution or illegal hazardous waste disposal.

When it comes to duties to creditors under the Companies Act 2006 a majority of the Supreme Court decided in BTI 2014 LLV v Sequana SA & Ors [2022] UKSC 25, 2022 WL 05014678 that the duty to protect the interests of the company’s creditors is engaged when the directors know, or ought to know, that the company is insolvent or almost insolvent, or that an insolvent liquidation or administration is probable.

“Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs. In those circumstances, the directors should have regard to the interests of the company’s general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary.”

Wrapping up

Understanding the duties of a company director is incredibly important in tough economic times. Without careful monitoring of your organisation’s finances, it is easy to miss the crucial signs that your company is struggling to pay its creditors. Likewise, not having policies and procedures to identify what is and what is not a conflict of interest could result in you, as a director, inadvertently entering into an agreement where a conflict exists.

The best way to avoid breaching directors’ duties is to work closely with a compliance and regulatory law solicitor who can analyse risks and advise on how to minimise your exposure to claims.

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