Directors’ Duties – The What and The How

Monday, February 8th, 2021

The Peter Parker principle from Spiderman of “with great power comes great responsibility” is rarely truer than in the context of company directors. Whilst the shareholders ultimately own the company, the day to day running is the burden of the appointed directors.  Therefore, it is imperative that directors are accountable for their actions to the company and are set high standards which need to be maintained at all times. Enter… Directors’ Duties.

What Are They?

The general duties of a company director are contained within sections 171-177 of the Companies Act 2006 and are set out as follows:

s.171- Duty to act within powers

s.172- Duty to promote the success of the company

s.173- Duty to exercise independent judgment

s.174- Duty to exercise reasonable care, skill and diligence

s.175- Duty to avoid conflicts of interest

s.176- Duty not to accept benefits from third parties

s.177- Duty to declare interest in proposed transaction or arrangement

These duties are fiduciary in nature, which attaches to them a great significance and degree of obligation to be followed by company directors when running the business. Implicit is the fact that directors are in a powerful, grave position of trust, meaning that good ethics need to be a mandatory part of holding the position.

Beyond the general duties under statute listed above, there are also implied fiduciary duties of confidentiality, good faith, not making any unauthorised profits whilst in office and during insolvency, to act in the best interests of creditors.

Why Are They So Important?

Without strict duties in place, the obvious risk would be of directors having carte blanche to do what they want with little consequence to the shareholders. This would make it impossible to rein in incompetent and/or nefarious directors and set a race to the bottom with respect to business conduct and decision making.

A lack of restraint on company directors would hardly be conducive to the successful commercial ecosystem that the UK enjoys and would serve to deter both investors and lenders from involving themselves with companies to help them grow. The lack of trust flowing from this would have a substantial impact on the economy.

Despite the various, very serious duties in place, there are still too many instances of directors breaching their duties and in the most egregious instances, costly litigation follows shortly afterwards.

There is a multitude of available remedies against a director in breach of his/her duties, such as providing an account, restoration of property, repaying profits where the company has suffered a loss, general damages, fines and in certain cases, criminal liability.

Not only does a director in breach of the duties owed to the company risk being sacked from the role altogether, there is also the risk of being pursued under the Company Directors Disqualification Act 1986 by the Insolvency Service. This is common in instances of “wrongful trading” where directors continue to run insolvent companies unable to pay their creditors. Under the act, a person can be banned from becoming a director again for up to 15 years and have other limitations imposed such as being disallowed from being involved in the formation of another company and pursuing professional qualifications in accountancy and law. Suffice to say, breach your duties as a company director and trouble will come knocking on your door.

How To Avoid Problems With Directors’ Duties

Do not take the office of a company director if you know that you lack the character, diligence and ability to bear on your shoulders the necessary duties and responsibilities that come with the position.

Other suggestions to assist in meeting the directors’ duties include: –

  • Treating the important administrative aspect of the role with respect.
  • Holding regular board meetings.
  • Designing and implementing transparent decision making.
  • If in doubt – disclosing anything that you ought to, such as conflicts of interest.
  • Recording accurate and clear board minutes.
  • Making use of experts where prudent including, yes, consulting your lawyers!

If you require further advice about navigating the challenging world of directors’ duties or are concerned that one or more individuals in your company are in breach of their duties, I encourage you to get in touch for an initial discussion.

Directors' duties - the what and the why. Hanne & Co's Abeer Sharma takes a look at directors' duties.- the what and the why. Hanne & Co's Abeer Sharma takes a look at directors' duties.

Abeer Sharma is a Solicitor in Hanne & Co’s Housing Law Team, specialising in litigation and dispute resolution.