An Introduction to Directors' Duties and their Responsibilities

In the business world, Directors play a central role in steering a company's trajectory. As a result, directors are subject to a range of duties to guide their conduct and ensure they act in the best interests of the company and its stakeholders.

The Companies Act 2006 (CA 2006) reorganised several key director duties based on equitable principles. These statutory duties contain a variety of obligations, including: 

• To act within powers.
• To promote the success of the company.
• To exercise independent judgement.
• To exercise reasonable care, skill and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare any interest in a proposed transaction or arrangement with the company.

Over the coming weeks, Mollie Leak, an experienced Solicitor in our Commercial Litigation team, will cover various topics in a four-part series of articles to help clarify the duties of a Director.

To begin, we'll provide a detailed overview of a director's role and their duties.

Scope of Directors' Duties and Responsibilities

The duties outlined in the CA 2006 apply to all company directors. A director is someone elected by shareholders (or appointed by other means) to oversee the company's management of affairs. Regardless of their official title, anyone occupying a director position is subject to the same duties as validly appointed directors.

Though the duties apply to all directors, expectations for how these duties are carried out (particularly the duty of reasonable care, skill, and diligence) may vary based on a director's specific role. For instance, a Finance Director may have greater responsibilities in evaluating expenses and accurately tracking the use of company assets.

These duties are owed to the company itself, not to shareholders, creditors, or fellow directors. Only the company can enforce these duties, but shareholders may initiate a derivative claim if a director breaches them.

Generally, a director's responsibilities to the company begin upon appointment and end when they step down. However, there are notable exceptions:

• The duties to avoid conflicts of interest and refrain from accepting third-party benefits continue after leaving the director position.
• If a director is excluded from all decision-making processes in the company, the fiduciary relationship between them and the company may be considered dissolved.

Fiduciary Duties

Directors have a responsibility to fulfil fiduciary duties for the company. As outlined in most companies' articles of association, directors are tasked with overseeing the company's operations and owe the company their undivided loyalty. This requires directors to prioritise the company's interests over their own.

Directors must also act in good faith, meaning they should conduct themselves openly and honestly with the company and fellow directors.

Other Duties of a Director

Understanding the Business: Every director, both individually and as part of the board, must understand the company's business sufficiently to fulfil their duties.

Regular Board Meetings: Directors should make decisions collectively, necessitating regular interaction and meetings. While there is no minimum meeting requirement, the board should convene regularly to carry out its responsibilities effectively.

Duty of Confidentiality: Directors are bound by a duty of confidentiality, meaning they must keep company information private. Disclosure requires the board's consent, and misuse of confidential information could harm the company.

Delegation and Supervision: Directors can delegate some duties when appropriate but must supervise their delegates. The extent of supervision depends on the relationship between the director and delegate, the nature of the tasks assigned, and the delegate's suitability for the role.

Additional Obligations and Shareholder Agreements

A company's articles may impose additional obligations on directors beyond the general duties. However, the articles cannot lessen the directors' duties set out in CA 2006.

There may be agreements between the company and shareholders that could override the articles. However, directors who are also shareholders must still prioritise the company's interests and avoid breaching their duties by engaging in conflicts of interest.

Director Duties in Insolvent Companies

When a company becomes insolvent, a director's duties shift towards protecting the interests of the company's creditors rather than shareholders, aiming to minimise outstanding debt. Directors must safeguard company assets and ensure its financial condition doesn't deteriorate further. Treating all creditors equally is crucial; prioritising one creditor over another could lead to accusations of breach of duty.

Mismanagement of funds during financial distress that leads to insolvency can result in directors facing financial liability for some of the company's debts.

In cases of insolvency, directors' powers are significantly reduced. Directors lose control over the company's conduct and operations, and any attempt to exercise prior powers is void. In voluntary liquidation, directors lose their powers once a liquidator is appointed. In administration, directors must obtain the administrator's consent before exercising any management powers.

Summary

To summarise, directors play a central role within a company and must balance their complex duties for the interests of the business. CA 2006 outlines clear duties to guide the conduct of directors, ensuring they act with integrity, diligence, and responsibility. Directors' decisions can significantly impact a company's success and sustainability, making it crucial for them to understand and fulfil their obligations thoroughly.

For more information and advice on directors' duties, company articles, or shareholder agreements, please contact Mollie Leak and our Commercial Litigation team on 023 8063 9311 or email enquiries@warnergoodman.co.uk.