Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director, that will brings a number of duties and responsibilities to you as an individual.
When you are appointed a director of a company you become an officer with extensive legal responsibilities. For a director of an incorporated body, the Companies Act 2006 sets out a statement of your general duties. This statement lists the existing ‘common law’ rules and principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The Companies Act 2006 highlights the connection between what constitutes the good of your company and a consideration of its wider corporate social responsibilities. The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company. The Act outlines seven statutory director’s duties detailed below, which need to be considered.
- Duty to act within their powers
As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.
- Duty to promote the success of the company
You must act in a way that would be most likely to promote the success of the company (its long-term increase in value), for the benefit of its members as a whole. You must also consider a number of other factors, including long term consequences of any decision, the interests of company employees, the impact of operations on the community and environment, maintaining a good business reputation and relationships with suppliers and customers, the need to act fairly as between members of the company.
- Duty to exercise independent judgment
You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.
- Duty to exercise reasonable care, skills and diligence
This duty states the common law rule of duty of care and skills, and imposes ‘subjective’ and ‘objective’ standards. Director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.
- Duty to avoid conflicts of interest
This dictates that, as a director, you must avoid a situation in which you may have, a direct or indirect interest which conflicts with the interests of the company. This duty applies in particular to a transaction entered into between you and a third party, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself. This clarifies the previous conflict of interest provisions and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.
- Duty not to accept benefits from third parties
Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been gained because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.
- Duty to declare interest in a proposed transaction or arrangement
Any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors before the company enters into the transaction or arrangement. A further declaration is required if this information later becomes either incomplete or inaccurate. However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware of the interest.
There are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly. Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by the company itself (the Board or the members in a general meeting), a liquidator when the company is in liquidation, an individual shareholder who can take action against a director for breach of duty. Where the company is controlled by the directors these actions are unlikely.
You will now be aware that the position of director must not be accepted lightly.