ABSTRACT
Directors are the people who officially manage the daily
operations of the company in the United Kingdom. The
Companies Act 2006 regulates certain duties that the directors must
follow for a lawful management of their company. It is
essential for people who intend to become a director to know
a brief of these duties.
Key words: Director, Duties of Directors,
Company Management in England, Companies Act 2006, Promote
the Success, Independent Judgement, Reasonable Care, Breach
of Duty, Relief from Duty
INTRODUCTION
For the Companies House, the regulator of companies in the
United Kingdom, a director of a company is probably the most
essential person in the company. A director is formally
registered under the name of the company and is the
contact point of the Companies House for any issue and shows
authority. The directors can be more than one and they carry all
the day to day activities of the company. In short,
being either a legal or real person, directors are the
people who manage the company. The details of the directors
are transparent to any viewer under the Companies House
webpage, except for some extraordinary circumstances.
The Companies Act 2006 (“Act”) regulates the
rules on all kind of company matters in the United Kingdom.
The Act is very detailed consisting of 47 Parts, 1300
Sections and 16 Schedules. Any director managing a company
should be familiar with the terms of the regulator Companies
House and the regulation The Companies Act 2006 on the daily
management of the company.
According to the Act, the shareholders of a company and
the directors of a company have separate duties and
responsibilities. The shareholder of a company can be a
director under a company, however, it is not essential. The
important part to note is that the duties of the directors
are higher than the shareholders.
DUTIES UNDER THE ACT
Under the Companies Act 2006, the 7 general duties of the
director are listed and a brief description is provided in
sections 171 to 177 for the duties of the directors under a
company.
Duty to Act within Powers (S171)1
The directors are bound to practise their powers in
accordance with the Articles of Association (“AoA”) of
the company, which should also be open to public on the
Companies House website. The Act calls the AoA as the
‘company’s constitution’.
Most companies in the United Kingdom practise with the
model AoA which sets the general rules for the company
management and the board. Companies are free to create
their own AoA by either changing the provisions of the model
AoA or creating an AoA from scratch. Any change requires a
good level of understanding of the Act for the provisions
not to be in contradiction with the regulations, and
should be done by lawyers.
It is advised that the directors go through the AoA of the
company to build an understanding of their duties and power when
running the company. The Act states that the directors
must act in accordance with the company’s constitution
and only act within the powers conferred to them.
Duty to Promote the Success of the Company
(S172)2
Although the term ‘promote the success’ sounds a
bit ambiguous, and improving the business of a company seems
to be a regular duty expected from a prudent director anyway;
the Act puts the duty on the director by drawing a wide range
for directors to consider when promoting the success of their
company. The Act requires the director to act in a way he/she
considers, in good faith, would be most likely to promote the
success of the company for the benefit of its shareholders.
The Act also states that, the directors must also consider
the consequences of their decision, and the effects of
these decisions to their employees, suppliers, customers and
others. The impact of these decisions to the environment, the
community and the reputation of the company are also stated
by the Act to be considered. Therefore, it can be seen that
the Act does not see it as a simple duty when saying
‘promote the success’ and asks the directors to
consider numerous elements when managing the day to day
operations of the company. This duty is clearly beyond a mere
financial success.
Another essential point to know here is that since 2019,
companies with more than 250 employees must provide
explanation in their annual financial report on how their
directors fulfilled this duty.
Duty to Exercise Independent Judgment (S173)3
Independent judgement is a very straightforward duty on the
directors requiring them to use their sole discretion on the
decision they should not imprudently follow an advice and use
their own independent discretion. If there is more than one
director, this duty separately relies on each director and one
director cannot avoid responsibility by relying on the
decision of another or the directors cannot agree to
act in a certain way.
The Act also states that the directors acting in
accordance with an agreement the company has signed or under
the limitation of the AoA will not infringe this duty.
Duty to Exercise Reasonable Care, Skill and Diligence
(S174)4
In short, this means that the director of a company should
be competent to carry the duties with a reasonable amount of
care, skill and diligence. It also means that every director
appointed to the company has to show the reasonable amount of
care to the daily management and decision making of the company
and a director should not be appointed just for their
name or reputation.
The minimum standard of care is expected from directors while
practising their duties and it is only expected for them to act as
a reasonable businessperson. However, if the director
is someone with specialist knowledge such as an accountant or
a solicitor, the expectations also increase and higher level of
care and diligence is expected from such directors. Although
it is not expressly stated in the Act, an important duty of
the directors under this clause is to follow the annual
financial statements of the company and keeping the
records of any decision.
Duty to Avoid Conflict of Interest
(S175)5
When managing their businesses, a very important aspect
stated by the Act is that the directors must not in any case
act within their own personal interest. The Act has regulated
three separate duties on this, which the first making
in relation to their powers. A director must not act as an agent or
a delegate of someone else, especially of the major
shareholders. This does not of course prevent directors from taking
advice from third parties, but it means that when giving the
final decision, is to avoid a situation where their personal
interest has a conflict with the interest of the
company. The Act clearly states that any direct or
indirect interest of the directors falls under this scope and
directors should be very careful for either actual or
possible conflicts.
In a large company management, conflict of interests may
become inevitable and, in these cases, the director’s
duty is to act loyal to the company and disclose any direct
and indirect conflict to other board members and act in
accordance. The other directors have the right to decide on a
potential solution for the conflict by either accepting or
rejecting it. The other board members must be careful the
follow the provisions of the AoA on this decision making
as, their consent is only possible if it is permitted under
the AoA.
Duty not to Accept Benefit from Third Parties
(S176)6
The Act puts an extra duty on the directors not accept any
kind of benefit from third parties that may affect their
impartiality and objective decision making. The limits for this is
that the benefit should directly or indirectly in
relation to them being a director. In addition, if the
gift does not arise any doubt of a potential conflict of interest,
then the Act notes the gift does not infringe this duty.
In practise, there may be situations where it is difficult
for the directors to decide if the gift is in relation to
their work or directors may see the amount of gift too small
to fall under scope. To prevent any uncertainty, it is
advised that the companies have a gift and hospitality
policy to draw the lines.
Duty to Declare Interest in Proposed Transaction and
Arrangements (S177)7
Duty to declare any interest in transactions can be read
together with duty to avoid any conflict. If it appears to be
that the director will have any kind of interest in a
transaction or arrangement of the company, the director
should disclose this to other board members. This can
be a notice in writing or a declaration made in a board
meeting.
BREACH AND RELIEF
The Act further regulates the consequences of any breach
of the duties in S171 to S177 and notes that the company, as
the entity which suffers from the breach, has rights to take
action against the director in breach.8 One or
more shareholders also have the right to make a claim
against the director in breach, if they are in belief that
they have personal financial loss.
By considering the results of the breach, there are
numerous options for the company can take from merely just
removing the director from office to taking criminal action
against the director. In general practise, the claim
only covers claims for financial loss and damage, returning
company property and injunctions against the director.
As a relief from any breach of the director, there are 3
possible ways for the director to come clear of any
claim.9 If they are authorised under the AoA, the
non-breaching directors can authorise the action of the director in
breach. In addition, the shareholders of the company
can ratify the breach of the director with a general assembly
resolution. When the shareholders ratify the breach, the
company loses its rights to take legal action. Finally, the
director can ask for a relief from the court by proving
that his action was honest and reasonable in those
circumstances.
CONCLUSION
The Act and the AoA puts high level of duties on directors,
which may become alarming for people who intend to become
directors of a company in the United Kingdom. However, the
regulations are there to remind the directors how
valuable their work is towards the society and in brief,
there are two humanly qualities expected from a director;
honesty and reason-ableness. An honest, reasonable and prudent
businessperson who has a basic level of understanding of the
Act and the AoA can successfully manage a business as a director.
It is only advised that they stay in contact with a
lawyer and have a professional accountant for any kind
of commercial and corporate issue to stay on the safe
side.
Footnotes
1
https://www.legislation.gov.uk/ukpga/2006/46/section/171
2
https://www.legislation.gov.uk/ukpga/2006/46/section/172
3
https://www.legislation.gov.uk/ukpga/2006/46/section/173
4
https://www.legislation.gov.uk/ukpga/2006/46/section/174
5
https://www.legislation.gov.uk/ukpga/2006/46/section/175
6
https://www.legislation.gov.uk/ukpga/2006/46/section/176
7
https://www.legislation.gov.uk/ukpga/2006/46/section/177
8
https://www.legislation.gov.uk/ukpga/2006/46/section/178
9
https://www.legislation.gov.uk/ukpga/2006/46/section/180
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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