Many people take on the role of Company Director without fully understanding what it entails. The statutory duties of a director come into sharper focus when a company is struggling and particularly when it goes into liquidation. Given the current climate we are likely to see a rise in the number of liquidations in the coming months, so this seems like a good time for a refresher on the duties and responsibilities of a company director. Under the Companies Act 206 there are 7 statutory (also known as fiduciary) duties owed by each director to their company and these form the basis of what it means to be a director.
1. Duty to act within their powersA director must act within their powers under the company’s constitution and its articles of association. These will have been created by you or your agent when you set up your company. As a director, it’s important you are familiar with the articles of association as these may constrain your decision-making powers in certain ways.
2. Duty to promote the success of the companyThe next important duty is that you must promote the success of your company. This means you must act in a way that you feel is likely to increase the value of your company. How do you do this? Well, when acting on behalf of the company, you must consider the likely consequences for all the different stakeholders, such as employees, suppliers, customers, and even communities. You should also consider the impact on the environment, the reputation of the company, the longer-term company success, and the impact on all of the shareholders, not just majority shareholders. When a company is solvent, its directors are under a duty to act in the best interests of the company and its shareholders, however when a company becomes insolvent, its directors have a duty to act primarily in the interests of the company’s creditors.
3. Exercise independent judgementDirectors must exercise their own judgement when making decisions. That’s not to say you can’t accept advice, but you must not allow other people to control your powers as a director.
4. Exercise reasonable care, skill and diligenceYou must perform to the best of your ability and you should be sufficiently familiar with your company’s affairs, including its financial position, to meet your responsibilities around managing the company’s business.
5. Avoid conflicts of interestDirectors must avoid any situation in which they have, or can have, a direct or indirect interest that conflicts, or may conflict with, the interests of the company. This duty continues to apply even when you’re no longer a director.
6. Not to accept benefits from third partiesThis duty stops directors from accepting a benefit from a third party which is offered to you because you are a director (such as a bribe) as it could cause a conflict of interest.
7. Declare any interest in proposed transactions or arrangementsYou must tell the other directors and shareholders if you might personally benefit from a transaction the company makes.
How to demonstrate that you have met your dutiesYou can best demonstrate that you have met your duties by keeping good records, including minutes of your board meetings. The law requires that you keep minutes of any board meetings for 10 years. These minutes can provide evidence that you gave due consideration to your duties and responsibilities as a director.
What happens you breach your fiduciary duties?If you breach your duties you could face civil, and sometimes even criminal, action in court. There are 3 groups of people who can bring an action against a director for failing to undertaking their duties effectively. These are:
- The company itself (so the Board or the shareholders);
- A liquidator when the company is in liquidation;
- An individual shareholder can take action against a director for breach of duty.