The Duties of a Company Director

Who is a Director?

Directors are those that are registered at Companies House as such and relate to limited companies. Whilst in most cases directors are formally appointed there are cases where an individual may be held to be a director by virtue of the fact that they, in reality control the company despite not being formally appointed. All directors, regardless of how they are appointed are subject to controls over the way in which they undertake their role.  

Background to Director’s Duties

Prior to the enactment of the Companies Act 2006 director’s duties were very much made up from case law. This meant that whilst directors were expected to behave in a certain way it was not formerly laid out in the same way as it now is in the Companies Act 2006. In reality the substance of the requirements have not changed considerably but by formalising them through statute more attention has now been drawn to the area of director’s duties causing an increase in understanding as well as fear for those undertaking a less formal, non-executive role.

Duty to Promote the Success of the Company

In accordance with section 172 a director is required to act in a way that promotes the success of the company. This means that directors will be required to consider a range of factors when making decisions such as the interests of the shareholders, the interests of the employee and the wider impact that the decisions are likely to have. It is thought that this may even extend as far as considering environmental issues.

By having such a wide range of factors that have to be taken into account the role of the director has become considerably harder although ensuring that suitable documentation is maintained surrounding how decisions have been made will often be deemed sufficient. (Normal)

Duty to Act with Reasonable Skill, Care and Judgement

Another requirement that has caused directors to rethink the way in which they operate is seen in section 174 which is the duty to act with reasonable skill, care and judgement. According to the provisions of the statute the directors must show reasonable skill, care and judgement based on both the level of skill, care and judgement that one would reasonably be expected to show given the nature of the role and also based on the actual level of skill and care that the individual has.

For example a finance director who is a qualified accountant would be expected to show a level of skill and care that is higher than a finance director without accountancy qualification. No distinction is made between executive and non-executive directors.

Other Issues for Directors

Conflict of Interests

Care needs to be taken when directors have multiple business interests. This is quite commonly seen whereby directors will hold multiple positions or may enter into a contract that they are personally interested in and this situation is dealt with in section 175 of the 2006 Act.

Whilst directors are required not to get involved in a situation that may give rise to a conflict with situations involving property being specifically noted as potentially dangerous. There are provisions within the act however allowing companies to overlook the conflict where the interest has been declared. Care needs to be taken to look at the constitution of the company to see how such conflicts can be dealt with particularly where voting needs to be done to approve a transaction that is subject to a conflict.

No-bribe Rule

A further rule has been established under section 176 where there is a duty placed on directors not to accept any benefits from third parties by virtue of their role. This is known as the ‘no bribe’ rule. Certain benefits can be accepted if they do not give rise to a conflict of interest but where there is likely to be such a conflict the benefit cannot be accepted, or it must be declared and given back to the company.

For example a director cannot benefit from a contract that the company enters into on a personal level either financially or through improving his own personal position.  

Consider a situation where a director receives a bottle of champagne from a supplier, it is unlikely that this would be deemed sufficiently serious to be seen as a conflict of interest.

Action Points:

  • Look at corporate responsibility policies to ensure rounded decision making
  • Maintain verbatim records of all decision making meetings
  • Consider all creditors and maintain an up to date list of such creditors
  • Identify any weaknesses in the decision making process
  • Inform all directors of their duties, regardless of their day to day involvement in the organisation