Company directors must comply with both fiduciary duties and statutory duties imposed on them by the Companies Act 2006 (Act). A breach of these duties can expose directors to personal liability.
Directors’ duties and responsibilities
Under the Act, company directors must:
- Act in accordance with the company’s constitution, and only exercise their powers for the purposes for which they were given.
- 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, and must have considered the following:
– The likely consequences of any decision made;
– The interests of the company’s employees; and
– The development of the company’s business relationships with suppliers and customers.
- Exercise independent judgment and make their own decisions. This does not prevent directors from acting in accordance with the company’s constitution or any company agreement.
- Exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with the same general knowledge, skill and experience.
- Avoid any situation that conflicts with the interests of the company, in particular, in relation to the exploitation of any information or opportunity. Examples of arrangements which may potentially give rise to a conflict situation include the following:
– Multiple directorships
– Personal interests
– Advisory positions with another Company
– Making a profit through a directorship
– Conflict with connected persons
- Not accept a benefit from a third party given purely because they act as directors.
- Declare interests in proposed or existing transactions or arrangements with the company.
General duties are owed to the company, who can take enforcement action against a director if there has been a breach. The decision to start proceedings against a director can be made by either the board or an officeholder if there is an insolvency of the company.
What penalties are there if a breach occurred?
Potential remedies include an injunction, damages or compensation. Failure to disclose an interest in an existing transaction or arrangement also carries the risk of a criminal fine.
Is there any form of relief for a breach of the general duties?
If a director finds he or she has committed a breach, assistance may be available:
- The breach may be ratified by resolution of the company’s shareholders
- The Court may grant relief if the director acted honestly and reasonably;
- The company may have arranged insurance for its directors; or
- The company may indemnify the director against costs incurred in successfully defending a claim for breach.
Do directors have any other responsibilities under the Act?
The most significant are the directors’ duties and responsibilities relating to the preparation and filing of the company’s annual reports. Other obligations relate to the restrictions and conditions placed on transactions between a director and the company, or loans made to a director.
A director also owes a duty of confidentiality to the company and must use company information for the benefit of the company only.
Where a company is in financial difficulties, directors should seek independent advice. Potential risks for a director in this situation if he/she does not comply with his/her duties include possible disqualification or being prevented from managing a company for up to 15 years, and being personally liable to contribute to the company’s assets. Examples include:
If a company becomes insolvent, a director must act in the best interests of the company’s creditors. A director can be ordered to contribute towards the general pool of assets available to creditors where he or she:
- Knew there was no reasonable prospect of the company avoiding insolvency;
- Continued to allow the company to trade after he or she knew or ought to have so concluded; and
- Did not take every step available to minimise potential losses to creditors.
A director does not need to have been dishonest to be liable for wrongful trading and cannot avoid responsibility by resigning.
This involves some dishonesty on the part of the director as intention to defraud the company’s creditors or some other fraudulent purpose is required. If a breach occurs, the director may be required to contribute to the company’s assets available and may face criminal proceedings.
This offence occurs if a director has misapplied or retained company assets. A director in breach may be ordered by the Court to repay money or contribute to the company’s assets available for distribution.
How can Nelsons help?
For further information on directors’ duties and responsibilities or any related subjects, please contact Rachel or a member of our team in Derby, Leicester and Nottingham on 0800 024 1976 or via our online form.