Seven general directors' duties owed to a company
Directors have seven general duties under the Companies Act 2006.
These duties, under CA2006 s170-181, are owed to the company and, with limited exceptions (principally, derivative claims by the shareholders), only the company can enforce them. Other rules of company law may also apply, including a duty for directors to consider or act in the interests of creditors (see the section in this guide on Directors' responsibilities if a company is in financial difficulty and dealing with investigations).
The duties apply to a director who is also a shareholder as they do to one who is not a shareholder. It is important that this is not overlooked by shareholding directors.
The seven general duties
To act within powers
The powers of directors are contained in a company’s constitution (ie, broadly, its articles). Directors must act in accordance with the constitution and only exercise their powers for the purpose for which they are conferred. It is therefore important that directors are familiar with their company’s constitution. The constitution may entitle shareholders to direct directors to take (or not to take) any specific action. The shareholders also have certain powers under company law (for instance, to change the constitution and to appoint and remove directors).
To promote the success of the company for the benefit of its members (shareholders) as a whole
This duty is often referred to as the "s172" duty.
In promoting the success of the company, directors must have regard to the following:
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standard business conduct; and
- the need to act fairly as between members of the company.
The duty is, however, a single duty owed to the company to promote success for the benefit of the members as a whole. The directors must decide, using their own business judgment in good faith, what is most likely to promote the success of the company and what weight to give to each of these factors (eg, some may be irrelevant in a given case).
If the purpose of a company is not for the benefit of its members (for instance, a not for profit company), the directors’ duty is to act in a way that is most likely to achieve the stated purpose.
Large companies must explain in their strategic report how the directors have had regard to the matters listed above when performing their duty to promote the success of the company.
To exercise independent judgment
Directors are required to act independently, without subordinating their powers to the will of others. They may obtain advice, but must exercise their own judgment on whether or not to act in accordance with it.
To exercise reasonable care, skill and diligence
In carrying out their responsibilities, directors must exercise reasonable care, skill and diligence. This involves a minimum objective standard of what would reasonably be expected generally of someone performing the director’s functions. This is supplemented and raised by a subjective standard that takes into account the general knowledge, skill and experience that the director actually has. Under the objective test, more might be expected of a director with an executive function (particularly a specific function such as finance director). Under the subjective test, more could be expected of a director having specific relevant knowledge, skills and experience (such as a member of ICAEW in respect of financial matters).
Directors should be sufficiently familiar with the company’s affairs, including its financial position, to meet their responsibilities for the management of the company’s business and should ensure that they have relevant information for this purpose. The amount of time that directors may be expected to devote to the company will depend upon the circumstances, for instance, whether directors are executive directors or non-executive directors.
To avoid conflicts of interest
Directors must avoid any situation in which they have, or can have, a direct or indirect interest that conflicts or may conflict with the interests of the company (for instance, an interest in a competing business). This duty may apply to a variety of situations (including in relation to cross-directorships in a group) but does not apply to transactions with the company (where separate requirements apply – see paragraph (7) below). The duty applies, in particular, to the exploitation of any property, information or opportunity, regardless of whether the company could actually take advantage of that property, etc. This continues to apply to former directors in relation to matters they become aware of when a director. The requirement does not apply where the matter has been authorised by the directors in accordance with the constitution and without the vote of any conflicted director being counted.
Not to accept benefits from third parties
This is a broad and strict duty which prevents a director from accepting a benefit from a third party conferred by reason of the director being a director or doing or omitting to do anything as director. It would include, but is by no means limited to, taking bribes. A third party is any person other than the company (or other companies in its group) or a person acting on behalf of the company (or other company in its group). The duty continues to apply to former directors in relation to acts or omissions when a director.
To declare interests in transactions or arrangements with the company
If a director is in any way directly or indirectly interested in a proposed transaction or arrangement with the company, the director must declare the nature and extent of the interest to the other directors and this declaration must be made before the company enters into the transaction or arrangement. A director need not declare an interest in some cases (for instance, if the other directors are, or ought to be, aware of the interest). There are certain formalities regarding how the declarations should be made and for general notices (eg, in relation to ongoing conflicts arising out of an individual’s connection with another company). Where a director becomes, or ought reasonably to become, aware of an interest arising after the company has entered into a transaction or arrangement, the director must declare it as soon as is reasonably practicable. The constitution of a company typically includes further provision as to how relevant conflicts of interest should be managed, for instance, regarding voting on proposed relevant transactions.
For other sections of this guide, please see below: