The constitution of a private company normally states that the company’s business will be managed by its directors, with most key decisions being taken at a full meeting of the board of directors or, where the constitution permits, by means of a directors’ written resolution.
In carrying out their function of managing the company’s business, the directors must comply with a number of duties which they owe to the company.
The Companies Act 2006 sets out the following eight duties:
A director is required to act in the way which he considers will be most likely to promote the success of the company for the benefit of its members.
In doing so, he must take into account, among other matters, the following six factors:
This list is non-exhaustive, but it is mandatory. So whatever other matters a director may take into account when making a decision, he must always consider these six factors.
In assessing whether a director has exercised reasonable care, skill and diligence, two tests must be applied:
If the answer to either of these questions is ‘No’, the director is in breach of this duty.
A director has a duty to exercise independent judgment, which simply means that he must use his own judgment in performing his role as a director.
It does not prevent him from seeking professional advice, as long as he uses his own judgment to decide how to proceed in light of that advice.
A director is required to act in accordance with the company’s constitution (which sets out the parameters within which a director must act), and to exercise powers only for the purposes for which they are granted.
The remaining duties all concern conflicts of interest, which are provided as follows:
Directors owe their duties to the company.
Therefore, if a director breaches his duties, it is the company which decides whether or not to take action against him.
Director’s duties must not be considered in isolation.
A particular act may constitute a breach of more than one duty.
A director who approves an action which is prohibited by the company’s articles will be in breach of his duty to act in accordance with the company’s constitution, and he is also likely to be in breach of his duty to exercise reasonable care and skill.
For advice about Director’s Duties, feel free to contact us at Edward Hands and Lewis Solicitors.
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