What are the general duties of a company director under the Companies Act 2006?

As a director, they must:

• Act within powers (section 171(a))

Directors must act in accordance with the company’s constitution which includes its articles of association. This sets out the powers and duties for the board of directors, the rights and obligations of shareholders and how decisions are made. If these rights are exceeded, then related decisions could be reversed, and compensation might have to be paid to the company for any related financial losses incurred.

• Promote the success of the company (section 172)

Directors must act in a way that they consider to be in good faith to promote the success of the company for the benefit of its members, taking into consideration the shareholders, employees, customers, suppliers, clients, the environment, and the community must be considered. The decision-making process should be documented where possible, demonstrating that consideration had been given to such decisions. In practice, it is typical for board minutes to be recorded to demonstrate this.

• Exercise independent judgment (section 173)

Directors should develop their own informed view on the company’s activities and should not allow their powers to be influenced or controlled by others. This does not prevent a director from seeking professional advice but if they do, they must remain impartial, reaching their decision independently and free from personal bias or third-party pressure.

• Exercise reasonable care, skill and diligence (section 174)

Directors must exercise the care, skill and diligence which would be exercised by a reasonably diligent person, or the levels that a company can fairly expect of a director. A director with professional training or skills (such as an accountant or lawyer) are held to a higher standard than those without.

• Avoid conflicts of interest (section 175)

Company directors must avoid situations in which they have or can have a direct or indirect impact that conflicts with, or may conflict with, the company’s interests. This particularly applies to the exploitation of property, information, or opportunities in which the director’s interests whether directly or indirectly, are in conflict with those of the company.

Examples which may give rise to a conflict situation include multiple directorships, personal interests, advisory positions or connected persons.

1. Personal interests – you own property adjacent to the company’s property which could be affected by the company’s activities;
2. Advisory positions – you work as, for example, an accountant or consultant to the company or a competitor;
3. Connected persons – this can include a spouse, partner, parent, child or other close family member.

To avoid a potential conflict of interest, a director should seek approval by the other members of the board and check the articles of association as there may be provisions relating to conflicts of interest in the company’s articles such as pre-authorised common conflict situations.

• Not accept benefits from third parties (section 176)

Directors must not accept any benefit (or a bribe) from a third party which is conferred because of their being a director or doing or not doing anything as a director. This duty is not infringed if the director’s acceptance of the benefit could not be reasonably regarded as being likely to give rise to any conflict of interest.

• Declare interests in proposed or existing transaction or arrangement with the company (section 177)

Where a director is in any way directly or indirectly interested in a proposed transaction or arrangement with the company, they must declare to other directors (and in some cases the company shareholders) the nature and extent of that interest. This duty is not infringed if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest if:-

1. The other directors are already aware or ought to reasonably be aware of it or if it concerns the terms of a director’s service contract which have been considered at a board meeting; or
2. Where the company has only one director.

What are the consequences of breach of a company directors’ duties?

The general duties are owed to the company, rather than directly to members and only the company will be able to enforce them.  A breach of a general duty gives the company a number of potential remedies including damages, compensation or an injunction. Failure to disclose an interest in an existing transaction or arrangement may result in a criminal fine.

The company, employees, vendors, competitors, investors, and customers could potentially sue for misconduct and negligence.