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What are a Director’s Duties?

Posted on Tuesday, 12th November 2013 by
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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:

  1. duty to promote the success of the company
  2. duty to exercise reasonable care, skill and diligence
  3. duty to exercise independent judgment
  4. duty to act within powers
  5. duty to avoid conflicts of interest
  6. duty to declare interests in proposed transactions
  7. duty to declare interests in existing transactions
  8. duty not to accept benefits from third parties.

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:

  1. the long-term consequences of the action
  2. the interests of the company’s employees
  3. the company’s business relationships with suppliers and customers
  4. the impact of the company’s activities on the community and the environment
  5. the advantages to the company of having a reputation for high standards of business conduct
  6. the need to act fairly as between the company’s shareholders.

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:

  1. did the director exercise the care, skill and diligence which would be exercised by a reasonably diligent person with his general knowledge, skill and experience?
  2. did the director exercise the care, skill and diligence which would be exercised by a reasonably diligent person with the general knowledge, skill and experience which may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company?

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:

  1. a director must avoid a situation in which he has an interest which conflicts with the company’s interests, unless the conflict has been authorised
  2. a director must declare to his fellow directors any interest which he has in a proposed or existing transaction or arrangement involving the company
  3. a director must not accept benefits from third parties.

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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The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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