Directors' powers, duties & liabilities

Powers, duties and liabilities of directors- Introduction

Contents

Directors' powers; General duties; Duty to promote the success of the company; Declaration of an interests; Other duties; Criminal liability; Consequences of breaching the general duties; Protecting a director from liability; Decision-making by directors

The directors of a company are responsible for its day-to-day management. They may exercise certain powers on behalf of the company, they owe various duties to it and they may be exposed to certain liabilities in their capacity as directors. 

Directors' powers

Directors have power to act on a company’s behalf by:

• the company’s articles of association
• the Companies Act 2006 (CA 2006)
• common law, and
• certain resolutions of its members

The directors’ powers will be subject to:

• any provisions in the company’s articles of association limiting those powers
• CA 2006, including in particular, the directors’ general duties as set out in CA 2006 and any matters reserved to the members by CA 2006
• common law, and
• certain resolutions of its members

Directors will usually have the ability to delegate their powers to others.

General duties

The directors of a company owe a number of duties to it.

Many of those duties have been developed by the courts over hundreds of years from more general common law rules and equitable principles. The main directors’ duties are set out in statute in CA 2006, ss 171 to 177. They are:

• A duty to act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred
• A duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard to various matters
• A duty to exercise independent judgment
• A duty to exercise reasonable care, skill and diligence
• A duty to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
• A duty not to accept a benefit from a third party conferred by reason of the director being a director, or their doing (or not doing) anything as director, and
• A duty for the director to declare if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the other

The general duties are important for two key reasons:

1. A failure by a director to comply with any of the general duties has potentially serious consequences for that director (although it may be possible for a director to have a breach of duty ratified, to protect himself from the consequences of a breach of duty or to obtain relief from a breach of duty, depending on the circumstances), and
2. The annual accounts and report prepared for each financial year of a company must contain a strategic report (except if the company is entitled to the 'small companies exemption') which helps members assess how the directors have performed their general duty to promote the success of the company

Duty to promote the success of the company

The duty to promote the success of the company requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (among other matters) to:

• 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 standards of business conduct, and
• the need to act fairly as between members of the company

Declaration of an interests

One of the general duties of a director is that if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company they must declare the nature and extent of that interest to the other directors.

There is also an obligation on a director who is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into with the company to declare the nature and extent of that interest to the other directors. This obligation is framed in a similar way to the duty to declare an interest in a proposed transaction or arrangement with the company, but it is not identical to it.

If a director is in any way, directly or indirectly, interested in:

• a proposed transaction or arrangement with the company of which they are a director, or
• a transaction or arrangement that has been entered into by the company of which they are a director, then

the articles of association of the relevant company should be reviewed, because:

• they may contain provisions that apply when a director has an interest in such a transaction or arrangement (such provisions may be wider in scope than the provisions in CA 2006 relating to the declaration of a director's interests and may, for example, put additional obligations of disclosure on the director), and
• they will determine whether a director who has an interest in such a transaction or arrangement may participate in decisions of the directors when it is the matter in hand

Note that the directors of a private limited company are able to authorise directors' conflicts. CA 2006 states that the duty to avoid conflicts of interests will not be infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or if the matter has been authorised by the directors.

The directors of companies incorporated after 1 October 2008 are automatically authorised to authorise the matter which may infringe the duty provided nothing in the company's constitution invalidates such authorisation.

Private companies incorporated before 1 October 2006 will need to pass an ordinary resolution to enable their directors to authorise conflicts in accordance with CA 2006.

Other duties

Although the general duties are important, they are not the only duties of directors. Directors have a range of other duties, both set out in statute and laid down by the courts.

In particular, the directors of a company continue to owe it certain fiduciary duties, such as the duty to act in the best interests of the company, the no conflict and no profit principles, and the equitable duty of confidence.

Directors also owe certain duties in relation to compliance with health and safety requirements under the Health and Safety at Work Act 1974.

Criminal liability

In addition to liability under CA 2006, directors may incur criminal liability for, e.g., insider dealing, making misleading statements or impressions, bribery, health and safety offences, gross negligence manslaughter, environmental crime and fraudulent trading.

Consequences of breaching the general duties

If a director breaches one or more of the general duties:

• the company may have grounds to bring a civil action against the director, or
• the director may be disqualified if they are shown to be unfit to be concerned in the management of a company as a result of the breach

Action for breach of duty may be taken by the board of directors on behalf of the company.

However, where directors may be unwilling, or unable, to take action against one or more of their fellow directors, a company may instead take legal action against a director (or former director) for breach of duty through a derivative claim brought by one or more members on behalf of the company.

A member can of course bring an action for unfair prejudice in their own right.

Protecting a director from liability

A director may be exposed to certain liabilities in their capacity as a director. CA 2006 contains a general prohibition against exempting or indemnifying directors against any liability that would otherwise attach to them in connection with any negligence, default, breach of duty or breach of trust.

However, there are statutory exceptions to this general prohibition, which provide that:

• a company may acquire and maintain insurance for its directors, or those of an associated company, against such liability, and
• a company may provide an indemnity for its directors, of those of an associated company, against certain liabilities, provided that such indemnity is a qualifying third party indemnity or a qualifying pension scheme indemnity under CA 2006

Directors can also be relieved from liability:

• by the members of the company ratifying conduct that amounts to negligence, default, breach of duty or breach of trust, subject to such conduct being capable of ratification, or
• by the court in certain circumstances

Decision-making by directors

The directors of a company will usually take decisions collectively — generally at board meetings or by way of passing a written resolution. CA 2006 does not regulate directors’ decision making, but a company’s articles will often set out how directors may take decisions, and specify any quorum and voting requirements among other things.

Where a company has adopted the model articles for private companies limited by shares or model articles for public companies limited by shares, the directors will have general power to manage the company and they will be permitted to delegate their powers to committees or individual directors as they see fit.

When taking decisions, directors should be mindful of their general duties and fiduciary duties. Particular care should be taken where a director may be interested in a proposed transaction or arrangement with the company and where the director holds multiple directorships across a corporate group.

A company’s articles will usually enable the directors to make their own rules about the conduct of board meetings. While meetings can be informal (in particular in smaller private companies), there must be an intention that a board meeting is taking place.

Instead of holding a board meeting, the directors may decide to make decisions by using the written resolutions method that is often a more flexible and more informal way of making decisions compared with making decisions at board meetings.

The voting threshold for written resolutions is significantly higher than that for board meetings (unanimity as opposed to simple majority). Given the higher voting threshold, in practice, decisions made by the written resolution method are generally not controversial as just one dissenting director can ensure that a resolution is not passed. Where a private company has a sole director, they will usually take decisions by way of a written resolutions.

By the publications team at: Contracts-Direct.com with the assistance of the referenced third parties (Lexis Nexis).

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Note: This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. The information contained in this document is intended to be for informational purposes and general interest only.

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