Directors’ Duties

The Duties

Directors of companies have always been subject to various duties but until the Companies Act 2006 (“the 2006 Act”) came into force, these duties had not been consolidated and set out in one place.  The duties set out in the 2006 Act are the: 

1. Duty to act within powers (which means that a director must act in accordance with the company’s constitution and  must only exercise his powers for their proper purpose)

2. Duty to promote the success of the company (which means that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as whole)

3. Duty to exercise independent judgement

4. Duty to exercise reasonable care, skill and diligence

5. Duty to avoid conflicts of interest

6. Duty not to accept benefits from third parties

7. Duty to declare interests in proposed transactions or arrangements with the company  

Although the 2006 Act sets out or “codifies” directors’ duties, the 2006 Act provides that the new duties are to be interpreted and applied in the same way as the previous case law and therefore such case law still needs to be followed. It should also be noted that the codification is not exhaustive and does not cover all of the duties which a director may owe to a company, such as: the duty to consider or act in the interests of creditors and the duty of confidentiality owed by a director to the company. The new duties are cumulative so where more than one duty applies in a given case, the directors must comply with each applicable duty.

Consequences of breach

The consequences of a breach of the new duties are the same as for breach of the corresponding common law or fiduciary duties.

 Ratification

The 2006 Act has significantly amended the law on ratification so that any decision by a company to ratify conduct by a director which amounts to negligence, default, breach of duty or breach of trust must be taken by the shareholders without reliance on the votes in favour by the director or any person connected to him (e.g. certain family members).

Actions requiring the approval of the company’s shareholders

There are certain types of transaction between a company and its directors which must be approved by the company’s shareholders. These transactions include loans to directors and service contracts which are more than two years in duration. However, perhaps the transactions of most relevance which require shareholder approval (or should only be entered into subject to shareholder approval) are “substantial property” transactions which are defined as arrangements between the company and a director (or a person connected with a director) of the company itself or its holding company relating to non-cash assets which either: (a) exceed 10% of the company’s asset value and are worth more than £5,000; or (b) exceed £100,000.

Summary

Despite directors’ duties being codified in the 2006 Act, the former law is still relevant when interpreting such duties. Directors should therefore seek advice if they are concerned about breaching any duties so as to ensure that they understand the full extent of such duties. Directors must take particular care when entering into transactions with companies of which they are directors and, dependent upon the nature of the transaction and the company’s articles of association, declare their interest to the other directors and/or seek the approval of the shareholders as regards such transactions.