One of the major benefits of running a company is that it’s a separate legal entity from the owners. This means that apart from specific circumstances, in most cases directors are only personally liable up to the value of their investment in the company.
However, company directors must comply with both fiduciary and statutory duties imposed on them by the Companies Act 2006. A breach of these duties can expose directors to personal liability.
Two of the duties outlined in the Companies Act 2006 are:
- Duty to promote the company’s success; and
- Duty to exercise reasonable care, skill, and diligence.
In addition to the above, the growth of environmental, social, and governance (ESG) awareness means that certain directors are expected to consider ESG factors when making decisions for their company.
Duty to promote the company’s success
Section 172(1) of the Companies Act 2006 states that a director must 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. Although success isn’t defined in the Companies Act, in the context of a solvent company it’s taken to mean a ‘long term increase in value’.
The Companies Act 2006 states that when acting to promote the success of the company, a director must have regard, as well as other factors, to:
- The likely consequences of any decisions 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 to maintain a reputation for high standards of business conduct; and
- The need to act fairly or between the members of the company.
Under the Companies Act 2006 the duty to promote the success of the company reflects wider expectations of responsible business behaviour, i.e. the interests of the company’s staff members and the impact of the company’s operations on the community and the environment.
Duty to exercise reasonable care, skill and diligence
In respect of this duty, Section 174 of the Companies Act refers to the common law duty of care, skill, and diligence and goes on to say the care, skill, and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill, and experience that may be reasonably expected of a person carrying out the functions carried out by that director in relation to the company; and
- the general knowledge, skill, and experience that the director has.
For certain companies and taking into account the role of the director and the nature of the business there will be an expectation that ESG factors are within the knowledge, skills, and experience of certain company directors and should be considered when making decisions.
How Nelsons can help
Alice Rees is a Partner at Nelsons and heads our expert Corporate services team.
If you require any legal advice in relation to the subjects outlined in this article, please get in touch with Alice or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.
Contact us