Powers, duties and liabilities of directors- Introduction
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 have power to act on a company’s behalf by:
The directors’ powers will be subject to:
Directors will usually have the ability to delegate their powers to others.
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:
The general duties are important for two key reasons:
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:
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:
the articles of association of the relevant company should be reviewed, because:
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.
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.
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.
If a director breaches one or more of the general duties:
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.
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:
Directors can also be relieved from liability:
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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