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Directors’ duties and responsibilities

Directors’ duties and responsibilities

Friday 23rd October 2015

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Corporate Matters - Issue 9

In the first of a series of articles on directors’ duties and responsibilities, we examine the general duties owed by directors under the Companies Act 2006:

1. Duty to act within powers

Directors must act in accordance with the Company’s constitution (including the Company’s Articles of Association and any resolutions or agreements (such as shareholder or investment agreements) of a constitutional nature) and may only exercise their powers for their proper purpose.  

2. Duty to promote the success of the Company

Directors must act in a way which they consider, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole.  When considering what is most likely to promote the success of the Company, directors should consider:

  • The likely consequence 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 standards of business conduct;
  • The need to act fairly as between the members of the Company.

3. Duty to exercise independent judgement

Directors must exercise independent judgement and make their own decisions. For example, if a director is appointed by a particular shareholder, that director must still make independent decisions which he considers to be in the best interests of the Company. This duty does not restrict the directors acting in accordance with an agreement which is entered into by the Company which restricts the future actions of the Company (for example a shareholders or investment agreement).

4. Duty to exercise reasonable care, skill and diligence

Directors must discharge their duties with the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by that director in the Company. Further, where a director has some additional or special knowledge or skill (above what would normally be expected of such director) that director is obliged to apply that knowledge or skill in discharging his duties.   

5. Duty to avoid conflicts of interest

Directors must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe their company and either their personal interests or the duties they owe to a third party. The Companies Act 2006 allows the shareholders of a company to authorise any conflict of interest a director may have, the shareholders of a company can also choose to include in the Articles of Association a provision allowing non-conflicted directors to authorise a conflict of interest of a conflicted director.

6. Duty not to accept benefit from third parties

A director must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director. This duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. This duty continues to bind former directors in relation to things done or omitted by them before they cease to be a director of the relevant company.   

7. Duty to declare interest in proposed transaction or arrangement with the Company

A director must declare the nature and extent of any interest (direct and indirect) in a proposed transaction or arrangement with the Company. The declaration must be made before the Company enters into the relevant transaction or arrangement.   

In subsequent articles/blogs we will look at particular scenarios, including insolvency, and how directors should act in such circumstances.

For more information on directors' duites and responsibilities please contact: 

Daniel Hayhurst

Tel: 0151 600 3155 
Email Daniel