Directors’ Duties

Types of Director

There are several types of company director and it is not always clear cut as to who the directors of a company actually are. It is, therefore, worth setting out the different types at an early stage.

Executive Director: carries out executive functions and will usually be and employee of the company.

Non-executive Director: does not hold an executive office nor is an employee of the company. These directors will often just devotepart of their time to the business of the company in some form of independent advisory role.

De Jure Director: a validly appointed director.

De Facto Director: acts as a director and is treated as such bythe board of directors but has not been validly appointed.

Shadow Director: any person on whose instructions the board of directors (or majority of the board) are accustomed to act. For example, a majority shareholder who the board always obeys without exercising its own judgement will likely be a shadow director.

In short, anyone who manages the business of a company registered at Companies House, whether that is a trading company or merely a social club, is open to being called a director and with that label will come the responsibilities of being a director.

Consider reviewing service contracts so that job descriptions accurately reflect the roles undertaken by directors. Service contracts should specifically refer to directors’ duties.

Who are the General Duties owed to?

The General Duties are owed to the company and so only the company itself will be able to enforce them. In certain circumstances, however, the shareholders may be able to bring a derivative action on behalf of the company.

Who are General Duties owed by?

The General Duties apply to all company directors, which include anyone occupying the position of director by whatever title they may go.

The position in respect of shadow directors is slightly different in that the General Duties only apply to shadow directors to the extent that corresponding common law rules or equitable principles apply.

The General Duties

The 2006 Act sets out seven General Duties which directors owe to their companies. They are to:

  1. Act within powers
  2. Promote the success of the company
  3. Exercise independent judgement
  4. Exercise reasonable care, skill and diligence
  5. Avoid conflicts of interest
  6. Not accept benefits from third parties
  7. Declare interests in proposed transactions or arrangements

It is entirely possible that more than one of these General Duties will apply to any particular set of circumstances which a director faces. The application of each General Duty must, therefore, be made in the context of each other General Duty which also applies. Furthermore, there are many other laws (for example, health & safety) which a director must obey.

Compliance with the General Duties does not permit a director to breach any other law which is applicable to him or her. A company may, through its articles of association, set more onerous requirements on its directors. However, the constitution cannot dilute the General Duties and, in particular, the company cannot exempt a director from breach of duty.

Consider taking steps to ensure that all directors are fully aware of their duties as a director. The provision of training for new board members may be advisable.

It’s important to review service contracts so that descriptions accurately reflect the role undertaken by directors. Service contracts should specifically refer to director’s duties.

Take steps to ensure that all directors are fully aware of their duties. The provision of training for new board members may be advisable. Also ensure directors are familiar with the company’s constitution.

Minute board meetings to demonstrate the factors taken into account when making decisions. Take independent professional advice where appropriate. Take steps to ensure that directors fully understand their roles in the company and whether training is needed on the standards which they each must meet to fulfil those roles.

Get conflicts of interest authorised by the board (or shareholders if necessary). Conflicts should be considered each time the board of directors meets and accurate records of directors’ interests should be maintained.

Review the company’s articles of association as these may need amending in light of the 2006 Act.

Take advice on obligations under the Bribery Act 2010 where necessary.

Consider whether the board has previously made decisions which may be open to criticism and whether these should be ratified by the shareholders.

Review current Directors’ and Officers’ Insurance policies. If you do not have Directors’ and Officers’ insurance in place consider whether it is necessary.

Take professional advice on directors’ obligations under specific laws if you are unsure. Remember ignorance of the law is no defence.