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Directors' duties and liabilities: Are you on top of the changes?
On 1 October 2007 the directors’ duties set out in The Companies Act 2006 (the “Act”) came into force. These duties replaced the equitable and common law rules that directors have been obliged to comply with until now.
Under the Act directors owe these duties to the company:
- A director must act in accordance with the company’s constitution, and only exercise powers for the purposes for which they are conferred.
- 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 its members as a whole. In doing so the director must have regard (amongst other matters) to -
- 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 as between members of the company.
- A director must exercise independent judgment.
- A director must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and the general knowledge, skill and experience which that director has.
- A director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
- A director must not accept a benefit from a third party conferred by reason of his being a director, or his doing (or not doing) anything as director.
- If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
If a director acts in breach of one or more of these duties then the company (and in some circumstances the shareholders) can sue the director personally. Remedies can include, compensation where the company has suffered loss, restoration of the company’s property, an account of profits made by the director; and/or rescission of a contract where the director failed to disclose an interest.
In addition, it is important to remember that the general duties in the Act do not cover all of the duties that a director may owe to a company. Many duties are imposed in other legislation (such as health and safety, food safety and environmental statutes) or remain un-codified (such as the duty to consider the interests of creditors in times of threatened insolvency). In addition, a director must comply with all other laws as well. Directors can also be personally liable in tort in certain circumstances.
Directors and the companies they work for need to take steps to ensure that they understand and comply with the new legislation, to minimise the risk of claims being brought against them. As a minimum we recommend the following:
- Give all directors a thorough briefing on the duties they owe to the company under the new Act and the internal procedures your company has (or will implement), to promote compliance. As and when new directors are appointed, they should receive a similar briefing.
- The terms of appointment and role description for directors should expressly refer to their duties under the Act (as should the terms of reference for any board committee).
- Companies should reassess their HR, compliance and corporate responsibility policies in light of the duties in the Act.
- Review your Directors and Officers’ liability insurance cover; would it provide sufficient cover if multiple directors were sued?
- Directors should always act in the best interests of the company and should take all relevant matters into account when making a decision.
- Directors should obey and follow the company’s constitution.
- Directors should be honest and act in a diligent, careful and well informed manner. If they have special skills that would benefit the company – they should use them. Always keep in mind that directors cannot avoid liability by delegating a task to someone else – it ultimately remains their responsibility.
- Ensure that proper records are kept of directors’ decisions. If there was a minority dissenting view that should also be recorded.
- Where possible, directors should avoid situations where their personal interests will conflict with the interests of the company. If the situation cannot be avoided, disclose the conflict promptly.
- If necessary, obtain independent legal advice.