Duties of a Company Director
The board of directors are typically responsible for the day-to-day operations of a company whilst shareholders are often only involved where fundamental decisions are being made. Generally speaking, this distinction makes the board the most important decision maker of a company.
In light of this, directors are bound by legal duties and obligations which they owe the company. The Companies Act 2006 (“CA 2006”) codifies seven key duties that every director of a company is bound by. These are all ‘high level’ so that there is room for interpretation and further development through the courts. These statutory duties apply to every legal director of a company whether they are a managing director, a non-executive director (NED), an investor director or a shadow director.
What are the duties?
There are seven statutory directors’ duties set out in the CA 2006. These are owed to the company rather than to any individual shareholders.
- Duty to act within their powers (s.171 CA 2006)
- Duty to promote the success of the company for the benefit of its members (shareholders) as a whole (s.172 CA 2006)
- Duty to exercise independent judgement (s.173 CA 2006)
- Duty to exercise reasonable care, skill, and diligence (s.174 CA 2006)
- Duty to avoid conflicts of interests (s.175 CA 2006)
- Duty not to accept benefits from third parties (s.176 CA 2006)
- Duty to declare interests in proposed transactions or arrangements with the company (s.177 CA 2006)
It is important to note that in addition to the above, there are other duties which a director will need to ensure compliance with, for example, ensuring proper implementation of employee health and safety procedures or ensuring the company is not trading wrongfully or fraudulently.
What remedies are available to the company for a director’s breach of their duty?
The civil remedies for a breach of directors’ duties are set out in section 178 CA 2006 but unlike the duties themselves, these are not listed out so clearly.
- For breaches of sections 171 to 177 (excluding s.174) CA 2006, the remedies available are derived from the law of equity and trusts. In brief, these are:
- to account for any profits made by the director(s) in question as a result of their breach;
- to return company property which was improperly disposed of;
- to avoid (rescind) any contracts entered into by the company as a result of a directors’ breach of their duties;
- to pay equitable damages to the company; and
- court orders (injunctions) which may prohibit and/or mandate certain actions by the director in question or even third parties.
- For a breach of section 174 CA 2006, the remedy available is damages for negligence which is derived from tort law. In other words, the company is entitled to compensation for the harm caused to the company through the director’s breach of their duty to exercise reasonable care, skill and diligence.
It is important to note that the above remedies are only available through a court order and usually as a result of an action brought on behalf of the company. Unsurprisingly they are highly fact sensitive. Court orders can be a lengthy and costly process to obtain and certainly with no guarantee of success.
In addition to the abovementioned civil remedies which the company may instigate, the director in question may also be subject to criminal liability.
How can a company or a director address a breach of directors’ duties?
Whilst the above sets out the civil remedies available, it is not always appropriate or practical to instigate court action. For example, some breaches may be procedural in nature only without any actual harm done, or even if otherwise, the harm done is not material enough to justify going through the courts.
Some ways in which a company or a director may address breaches (or potential breaches) of directors’ duties include:
- Board approval – Note this only applies to breaches of section 175 CA 2006 – the duty to avoid conflict of interests. The board (excluding the director in question) can resolve to approve a director’s proposed actions which gives rise to a conflict of interests or a conflict of that director’s duties (for example where an investor director also sits on a competitor’s board). This is only allowed where the articles of association permit the board to do so. Typically, the board are also allowed to impose conditions to this approval.
- Shareholder approval:
- By way of articles – the articles may prescribe that some circumstances are permitted which may otherwise constitute a breach of a director’s duties. For example, investor directors or NEDs may also sit on the board of a competitor. The articles should be amended so as to appropriately address potential issues that arise out of these scenarios.
- By way of resolution – shareholders can by way of ordinary resolution (over 50% by voting power) approve directors’ breach of their duties. This can be made after the breach has occurred (ratification). If the director in question is also a shareholder they are not eligible members for the purposes of the approval vote. Note further that once a breach has been ratified this would preclude the company from seeking certain of the above listed remedies.
- Removal of the director in question –
the company may ask the director in question to resign. Failing that, companies may remove a director via a statutory process as set out in the CA 2006 which requires an ordinary resolution (over 50% by voting power), noting that this is a much stricter process than simply circulating a written resolution. The company’s articles may also prescribe alternative routes for removing a director and there are other methods such as via a court order or if the director is bankrupt. In any case, should the director in question also be an employee, their dismissal would also need to be considered through the lens of employment law for example by a claim for unfair dismissal.
- Insurance – companies can obtain D&O insurance. This is a highly regulated insurance product and may not cover all scenarios or breaches of directors duties.
How can we help?
The team at Ignition are experts at working proactively to ensure that these risks are appropriately addressed or mitigated. For further information, please contact Fai.