Being a director is not just a badge, it is an office holder that comes with legal duties you owe to the company.
A company director is an individual appointed to manage the affairs of a company. Directors can be executive directors, who are involved in the day-to-day running of the business, or non-executive directors, who provide independent oversight and guidance.
What are the seven duties of a director under the Companies Act 2006?
The Companies Act 2006 outlines the key statutory duties every company director is required to follow.
- Duty to Act Within Powers
Directors must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they were granted. This means they should make decisions that align with the company’s articles of association and not exploit their authority for personal gain.
- Duty to Promote the Success of the Company
Directors are required to act in good faith to promote the success of the company for the benefit of its members as a whole. This involves considering the long-term implications of decisions, the interests of employees, and the need to foster business relationships.
- Duty to Exercise Independent Judgement
Directors must exercise independent judgement and not simply follow the instructions of others. This encourages directors to make informed decisions based on their knowledge, expertise, and the best interest of the company.
- Duty to Exercise Reasonable Care, Skill, and Diligence
Directors are expected to perform their responsibilities with a degree of care and diligence that could be reasonably expected of someone in their position. This includes being informed about the company’s operations and making decisions based on sound reasoning.
- Duty to Avoid Conflicts of Interest
Directors must avoid situations where their interests conflict with those of the company. Any potential conflicts must be disclosed, allowing the company to consider how best to address them.
- Duty Not to Accept Benefits from Third Parties
Directors must not accept benefits from third parties that may arise from their position as a director unless such acceptance has been authorised by the company.
- Duty to Declare Interest in Proposed Transactions
Directors are required to declare any interest they have in existing or proposed transactions with the company. Transparency is critical to ensuring that decisions made by directors are in the best interest of the company.
Fiduciary Duties
In addition to statutory duties, directors owe fiduciary duties to the company. These duties are based on trust and confidence, which means that directors must act honestly and in good faith. The fundamental fiduciary duties include:
Duty of Loyalty
Directors must act loyally in the best interests of the company and its members. This encompasses avoiding any actions that could harm the company’s interests.
Duty of Good Faith
Directors must act in good faith, promoting the success of the company above their interests. They must not misuse their position for personal benefit and must ensure their actions are consistent with the best interests of the company.
Legal Implications of Breaching Duties
- Failure to adhere to these duties can result in serious consequences. Directors may be held personally liable for any loss the company suffers due to their breach of fiduciary or statutory duties. Furthermore, disqualification from acting as a director can occur if it is deemed that a director has acted in an unfit manner or engaged in misconduct.
- Additionally, directors may face legal action from shareholders, creditors, or even regulatory authorities if they breach their duties. It is important for directors to understand that their actions have direct implications for the health of the company and its stakeholder community.
Best Practices for Directors
To fulfil their duties effectively and safeguard themselves against potential breaches, directors should consider the following best practices:
- Seek Ongoing Training and Development
Regular training in corporate governance and understanding legal obligations can assist directors in staying informed about their responsibilities.
- Establish a Clear Governance Framework
Developing a robust corporate governance framework facilitates better decision-making and ensures compliance with legal obligations.
- Foster Open Communication
Encouraging a culture of transparency and communication within the board and the wider business can help identify potential conflicts of interest and issues early on.
- Document Key Decisions
Keeping thorough records of board meetings and decisions made ensures that there is a clear trail of accountability, supporting the integrity of the decision-making process.
- Regularly Review Company Policies
Periodically reviewing company policies regarding conflicts of interest, ethical behaviour, and compliance can assist in maintaining high standards of corporate governance.
How Can Marlborough Law Help?
A director must act in accordance with the company’s constitution (such as the Articles of Association and resolutions) and exercise its powers for the purpose they were given.
At Marlborough Law, we have the experience and expertise to guide you through the complexities and pitfalls of Director’s Duties and all associated issues. We have legal experience in a breadth of matters, but we also have something few lawyers have: a depth of business, commercial and life experience that allows us to provide practical legal advice and solutions that suit your needs.
Contact us for impartial advice on all your company issues.
