The Companies Act 2006 (the “Act”) is the cornerstone of UK company law, laying out a comprehensive framework of responsibilities for company directors. These duties ensure directors act in the best interests of the company and its stakeholders, including shareholders, employees, and the wider community.
The Act provides seven core fiduciary duties that each director must adhere to. Directors owe these duties to the company. Breaches can result in fines, disqualification, or criminal charges, depending on the severity. Remedies for breaches include injunctions, compensation, or requiring the return of profits.
Therefore, it is important to really understand the requirements laid out in the Act before, and during, your directorship tenure.
Below we set out the seven key duties, how to ensure you comply and details of the consequences if you don’t.
Seven key director duties:
Duty to Act Within Powers (Section 171)
Directors are required to act in accordance with the company’s constitution and only exercise their powers for their intended purposes. The company’s constitution primarily includes its Articles of Association and any shareholder agreements. Directors must not exceed the limits of their authority as outlined in these documents.
Duty to Promote the Success of the Company (Section 172)
Directors are obliged to act in a 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. This duty is very wide and encompasses the need to consider the following:
- The likely long-term consequences of decisions.
- The interests of the company’s employees.
- The need to foster business relationships with suppliers, customers, and others.
- The impact of the company’s operations on the community and the environment.
- The desirability of maintaining a reputation for high standards of business conduct.
- The need to act fairly between members of the company.
Duty to Exercise Independent Judgment (Section 173)
Directors must exercise independent judgment. While directors can seek advice from others, including legal and financial experts, they must make decisions independently and not merely follow instructions from others, even if they represent a particular shareholder’s interests.
Duty to Exercise Reasonable Care, Skill, and Diligence (Section 174)
Directors must perform their roles with the care, skill, and diligence that would be expected from a reasonably diligent person with:
- The general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions of a director in relation to the company.
- The general knowledge, skill, and experience that the director has.
This creates both an objective and a subjective standard for assessing a director’s conduct.
Duty to Avoid Conflicts of Interest (Section 175)
Directors must avoid situations where they have, or could have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company. This applies to both existing and potential conflicts, and directors must disclose any such conflicts to the board and seek approval from the other directors or shareholders.
Duty Not to Accept Benefits from Third Parties (Section 176)
Directors are prohibited from accepting any benefits from third parties that could reasonably be regarded as likely to give rise to a conflict of interest. Acceptable benefits, such as corporate hospitality, must not be so significant that they could impair a director's independence.
Duty to Declare Interest in Proposed Transactions or Arrangements (Section 177)
If a director is directly or indirectly interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. This declaration should be made before the company enters the transaction or arrangement.
Enforcement and Consequences of Breach
Breaches of these duties can lead to severe consequences for directors, including:
- Civil Penalties: Directors may be required to compensate the company for any loss resulting from their breach, return any profits made, or set aside any unauthorized transactions.
- Disqualification: Directors may be disqualified from acting as a director for a specified period.
- Criminal Penalties: In some cases, breaches can result in criminal charges, leading to fines or imprisonment.
How Directors Can Protect Themselves
To avoid breaches of the duties laid out in the Act simple measures can be taken. You should:
- Really familiarise yourself with the company's constitution, and shareholder agreements and relevant legal requirements.
- Seek independent legal advice of corporate governance specialists when necessary.
- Ensure all decisions are well-documented through minutes, resolutions and other board notes and made in good faith, with consideration for the long-term success of the company.
- Disclose any potential conflicts of interest and obtain proper authorization for transactions that may involve such conflicts.
Conclusion
The Act establishes a clear and structured framework of duties for company directors, promoting responsible management and safeguarding the interests of the company and its stakeholders. By understanding and adhering to these duties, directors can ensure they fulfil their legal obligations and contribute to the sustainable success of their companies.
Here to help
Our Corporate team are here to help with any queries in relation to your duties as director and/or wider corporate governance or reporting requirements. Please do reach out if we can assist.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
