Although many don’t realise it, being a director of a limited company is an onerous task. As a director, you personally owe many legal duties to the company. Historically, it’s been difficult to find a clear guide to all of these duties and, although the new Companies Act 2006 compiles a list of most of the main duties, it’s incomplete. This article is intended as explain the duties of all directors in plain English and point out what will happen if you fail in your responsibilities.
Directors’ Duties Explained
The duty to act within the company’s powers – a director must always act in a way allowed by the company’s Articles of Association and decisions made by the Company.
The duty to promote the success of the company – 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 the shareholders as a whole. When doing this, he must have regard to the following things: - the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly between the members (shareholders) of the company.
This means that making the most money for shareholders (profits) should not be the only concern of a director; he must also consider these wider effects. Cousins Business Law advice is that the above checklist is gone through when making decisions at board meetings, so that all the directors can leave an audit trail to show they have considered all these matters.
The duty to exercise independent judgment – this may arise, for example, if the bank or major funder wants you to act in a particular way. This duty can however be modified by agreement or by changing the company’s Articles of Association.
The duty to exercise reasonable care, skill and diligence – a director will be judged according to what would be reasonable in his role as well as any particular skills or knowledge he has. For example, a financial director would be held more culpable for financial errors than a general director - but all directors must perform to a minimum reasonable standard. For example, a sales director will not be able to get away with saying that he left the finances to the financial director to deal with and had no idea about the company’s finances. It is his duty to find out.
The duty to avoid conflicts of interest – a director must avoid any situation where he has or could have a conflict or possible conflict of his interests with those of the company. He cannot exploit any property, information or opportunity that comes his way because of company activity. For example, if in the course of running a company, a director discovered a business opportunity, he cannot exploit this himself or by setting up another company, even if the first company could not take advantage of that opportunity. There are a few exceptions to this, the most important being that the board of directors can authorise a director to exploit a particular opportunity even if there is a conflict.
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