Directors - Do You Know Your Duty?

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Article

09 October, 2020

With the uncertainty of Brexit and the current impact of COVID-19 threatening many businesses, the responsibility of running a company rests solely with the directors of the company. It is important therefore that a director is aware of the duties imposed on them by law.

What is the difference between a director and a shareholder?

There is often some confusion over the role of a director compared to that of a shareholder, however they both play completely different roles within a company. A shareholder owns the company, by owning its shares, whereas a director manages the day to day running of the company on behalf of the shareholders. A director need not own shares in the company. However, especially in owner managed businesses and SMEs, it is not unusual for one person to be both a director and a shareholder.

The Duties

As a director you must:

  • Act Within Powers

A director must act in accordance with the company's constitution such as its articles of association. A director should only exercise their powers for the purposes for which they were given.

  • Promote the Success of the Company

The concept of success has an uncertain meaning. The government has stated that 'success' in this context will usually mean 'long term increase in value' for commercial companies - what will promote and what will constitute the success is the good faith judgment of the directors.

  • Exercise Independent Judgment

Directors must exercise their powers independently, whether by delegation or otherwise. This means that a director should always act in the best interests of the company as a whole and for example, should not agree with a third person to vote in a particular way.

  • Exercise Reasonable Care, Skill and Diligence

A director must exercise the same care, skill and diligence that would be exercised by a "reasonably diligent person". Therefore, someone should not take on a directorship unless they are sufficiently qualified or experienced to be able to fulfil the functions that they might reasonably be expected to carry out.

  • Avoid Conflicts of Interest

A director must avoid a situation in which they have an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the use of information, opportunity and property.

  • Not Accept Benefits from Third Parties

A director must not accept any benefit from a third party which is given because of their role, for example this includes a situation where a director is offered something in return for doing (or not doing) something in his position as director.

  • Declare Any Interest in a Proposed Transaction or Arrangement with the Company

Directors may not have an interest in a transaction with the company unless the interest has been authorised by the members. A director who is, directly or indirectly, interested in a transaction or arrangement with the company, must declare the nature and extent of that interest to the other directors in accordance with the company's articles of association.

The Consequences

A breach of a duty can give the company a number of potential remedies including an injunction, damages or compensation. Failure to disclose an interest in an existing transaction or arrangement with the company also carries the risk of a criminal fine.

It is therefore important that all directors are briefed on their duties, particularly in the current climate, and ensure that compliance is clearly documented. Directors should ensure that board minutes are drafted to reflect accurately what was discussed during a board meeting and ensure that the company's articles of association reflect the corporate decision making process.

For more information contact David Filmer in our Corporate department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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