Directors’ Duties

They say it’s great to be a Director of a company, it’s a sign of status; get your business cards updated; change your profile on Linkedin? So what really is a Director? Anyone who is part of the senior management team where their actions demonstrate or portray a position of authority.

Directors may also be known by different titles, Trustees for example. To be obligated under the Companies Act 2006 a person does not need to be registered at Companies House, may not have completed an AP01, (Appointment of a Director Form). These people are often known as Associate Directors.

What does all this mean?

There are a number of legal obligations under the Companies Act 2006. Directors need to be aware that if the Act is contravened they could be personally liable for the breach. Depending on the severity, this could range from being barred from acting as a Director to time in prison.

The main sections of the Act are s171 and s172.

s171 Duty to act within powers.

A Director can’t commit the company to a contract outside its constitution. For that matter neither can a Director act outside of their role, For example, a Sales Director couldn’t sign a contract to acquire a new business in an un-associated industry.

s172 Duty to promote the success of the company.

A Director must act in the best interests of the company and its stakeholders including creditors.

This is probably the hardest to disprove. By the time a Director is in breach they have probably already been sacked, or at least put on gardening leave.

s173 – s182 deal with how to resolve conflicts, generally where there is the potential for a breach of s172.

s173 Duty to exercise independent judgement.

This means you are allowed to disagree; it allows a Director to take independent advice.

S174 Duty to take reasonable skill care and diligence.

It’s all about being prudent, although if a Director has specialist knowledge of the subject matter they can exercise their skill, ie an Accountant acting as the Finance Director.

 

s175 Duty to avoid conflict of interest

 

Probably the most important area, often with a non-Executive Director. It doesn’t matter if the conflict currently exists or it could be a potential one.

A potential conflict from a current or new relationship includes family members and their actions too.

When the Director becomes aware of any conflict, they must inform the Board. If a conflict with s172 looks likely the Board will need to make a decision. If this situation arises make sure everything is documented.

Be aware this also refers to previous directors. Although a Government Minister can happily go off get a seat on a board of some listed company in the city.

 

s176 Duty not to accept benefits from 3rd parties.

This is not just about a jolly to the races, it’s about the influence of the Director in making decisions or absenting themselves from the decision-making. We have to be practical about it, after all, the Companies Act isn’t going to stop business entertaining.

A company could consider putting a policy in place outlining acceptable benefits which could be companywide and not restricted to the Directors. Where there is the likelihood of a breach, do ensure there are mechanisms already in existence to enable reporting to a higher authority.

s177 Duty to declare interest in a proposed transaction.

Obviously all Directors have to declare any interest.  Do make sure it is recorded.

Although if the other Directors are aware of the interest and the transaction is part of their service contract there is an exemption.

S182 Duty to declare interest in an existing transaction.

Same as s177 this is a catch-all to ensure compliance with s172.