Directors’ Duties - The Companies Act 2006 (“CA 2006”) regime

A director has seven general duties, to be considered alongside other additional specific duties.  The general duties are –

1.  Duty to act within powers

Section 171

A director must act in accordance with the company’s constitution and only exercise powers for the purpose for which they are conferred.

2.  Duty to promote the success of the company

Section 172

A director must act in the way they consider (in good faith), would be most likely to promote the success of the company for the benefit of its members as a whole.

When adhering to this duty a director must take into consideration a number of factors including the interests of the company’s employees, the company’s business relationships and the long-term consequences of the action taken.

3.  Duty to exercise independent judgment

Section 173

This duty replicates the previous common law duty that a director may not fetter their own discretion.

4.  Duty to exercise reasonable care, skill and diligence

Section 174

It is necessary to consider the care, skill and diligence that would be exercised by a reasonably diligent person with (a) the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (being an objective standard), and (b) the actual general knowledge, skill and experience that the director has (being a subjective standard).

The required level of care, skill and diligence is whichever is the higher of these two standards.  At a minimum, a director must display the knowledge, skill and experience set out on the objective test.  However, where a director has specialist knowledge, the higher subjective standard must be met.

5.  Duty to avoid conflicts of interest

Section 175

A director must avoid a situation where they have, or may have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company.  The test of whether there is a breach of this duty is objective, and does not depend on whether the director is aware that their actions are a breach of their duty.

It is important to note that this duty continues to apply in certain circumstances after the person ceases to be a director.

6.  Duty not to accept benefits from third parties

Section 176

This section codified the fiduciary duty prohibiting the exploitation of the position of director for personal benefit.

The codified duty now states that a director cannot accept a benefit from a third party due to their position of being a director or by anything they do, or do not do, as a director.

Similar to the duty to avoid conflicts of interest, this duty continues to apply in certain circumstances after the person ceases to be a director.

7.  Duty to declare an interest in a proposed transaction or arrangement

Section 177

A director must declare a direct or indirect interest in a proposed transaction or arrangement with the company to the other directors of the company before entering into any such transaction or arrangement.

These general duties should not be considered in isolation – it is possible that a director may be in breach of more than one duty.  Compliance with one duty does not ensure compliance with the others and compliance with one duty cannot justify the breach of another.

Consequences of breach

As the general duties are owed to the company only, it is only the company that can enforce them (acting via its board of directors).  The decision on whether or not to take action against a director for breach of their duties is down to the discretion of the board.

It is possible in some circumstances for a shareholder to take action for a breach of duty by a director through the company itself by means of a derivative action in the name of and on behalf of the company, not on behalf of the shareholder.  (Look out for further information on derivative action in an upcoming blog series)

The consequences for a director who breaches any of their duties can be serious.  The CA 2006 provides that if a breach occurs the consequences are the same as would apply if the corresponding common law or equitable principle applied.  Breach of a director’s duties can also give the company grounds to dismiss the director as an employee and the director could face disqualification proceedings, in addition to the general remedies available to the company for such a breach.

Look out for the next blog, which will consider the other duties and responsibilities of a director

If you would like further information regarding the topics discussed in this blog, please contact:

Calum Crighton:  ccrighton@gilsongray.co.uk / 01224 011687

Kim Anderson: kim.anderson@gilsongray.co.uk / 01224 011694