In this second newsletter on UK directors, we look in more detail at their legal obligations.
Where can I find the obligations?
There are a large number of obligations on directors throughout English law. Some are general and some are very specific. An example of the latter would be the obligations arising when a company is, or is likely to be, trading whilst insolvent and can be found in the Insolvency Act. This newsletter doesn’t attempt to cover all the specific obligations.
What then are the general obligations?
Directors have long been subject to general duties but these were incorporated into the Companies Act 2006. In summary, they are:
In summary, these duties are:
• To act within thier powers
• To promote the success of the company
• To exercise independent judgment
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare any interest in a proposed transaction or arrangement with the company.
Who are the duties owed to?
The general duties are expressed to be owed just to the company. The consequence of this is that it is just the company that can enforce the obligations.
That doesn’t sound like good news for shareholders?
On the face of it, it doesn’t. However, the shareholders have the right to appoint and remove directors, so they can still control the board in this respect and, should they wish, they may be able to flood the board and bring an action against a defaulting director if the board hasn’t done so already.
An added layer is that in certain other circumstances, a shareholder can have the right to bring a claim, as may creditors if the company becomes insolvent and falls into the hands of the creditors.
Do the duties apply to executive and non-executive directors?
Yes, the Companies Act makes no distinction between the two.
However, in practice, the courts may take into account the distinction in certain circumstances. For example, the duty to exercise reasonable care, skill and diligence would be determined by both an objective test (the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of a director) and a subjective test (the general knowledge, skill and experience that the director actually has). So, if a non-executive director has been brought onto the board because of their technical knowledge of the company’s product, the courts may take into account the fact that the director may not have specialist financial or competition law knowledge, for example.
Can conflicts be managed?
They can, but informed consent would generally be required. The company’s articles of association may contain a mechanism for either the board or the shareholders to approve a conflict or a contract between the company and a director or a third party in which the director is interested.
Prevention is the best medicine - if you need any assistance in understanding directors’ duties and managing conflicts, please do get in touch.