Directors’ Duties – General
Prior to the Companies Act 2006 (“CA 2006”), there were three main types of duty that a director owed to his company; the fiduciary duty, the duty of skill and care, and statutory duties e.g. to file accounts. Other duties i.e. to creditors, employees, shareholders and auditors arose in certain circumstances, and on insolvency, further duties arose to co-operate with insolvency practitioners.
With the exception of certain duties which were laid down in statute, directors’ duties were imposed at common law.
The CA 2006 has provided much more detailed information on directors’ duties and has in part codified the common law duties. Notably, the CA 2006 widens the scope of directors’ duties beyond duties to the company itself and requires that company directors take some account of the wider environment; to the communities in which they operate, to their employees, to the environment and to their customers.
The CA 2006 lays out in s171-177 the duties that directors owe specifically to their company.
These are as follows:-
- To act within powers as set out in the company’s constitution, i.e. the Company’s Articles and Memorandum of Association;
- To promote success of the company;
- To exercise independent judgment;
- To exercise reasonable skill, care and diligence;
- To avoid conflicts of interests;
- Not to accept benefits from third parties;
- To declare any interest in any proposed or existing arrangements or transactions with the company.
While the new statutory rules are to have effect in place of the common law rules and equitable principles, S.170(4) states that regard should be had to these rules and principles in interpreting and applying the statutory duties.
It follows that the common law rules continue to apply and impose the following duties:-
- Directors must not make a secret profit from his position as director. Personal profit is only permissible if expressly permitted by the company.
- Directors must act bona fide in the interests of the company as a whole, and not for any collateral purpose.
The main statutory responsibility falling on directors is to be aware of the financial position of the company at all times and to ensure that the company keeps full and accurate accounting records. Directors must ensure a full balance sheet and profit and loss is prepared, presented to shareholders and filed with the Registrar of Companies. Normally the return will be made by the company secretary however in some cases directors can be liable for a fine if returns are not made. Persistent default can lead to disqualification from being a director of a UK company.