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Directors duties – a guide

Directorships bring with them clear legal responsibilities and not even a pandemic is reason to avoid them, says legal expert Michael Budd.

Michael Budd
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Michael Budd

The duties being discussed in this article concern directors’ general duties and the company of which they are a director. There are numerous additional specific duties of directors contained throughout the Companies Act 2006, such as the duty to deliver accounts to Companies House. Other pieces of legislation also impose specific duties on directors, such as in relation to health and safety and environmental protection.

What are the general duties owed by a director to the company?

Link to Legal featureThe core general duties owed by company directors comprise:

  1. the duty to act within powers;
  2. the duty to act in good faith to promote the success of the company for the benefit of its members as a whole;
  3. the duty to exercise independent judgment;
  4. the duty to exercise reasonable care, skill and diligence;
  5. the duty to avoid conflicts of interest;
  6. the duty not to accept benefits from third parties; and
  7. the duty to declare an interest in a proposed transaction or arrangement.

In light of the COVID-19 pandemic, boards should be aware that a director who (being an employee) is furloughed, is not thereby relieved of their above general duties.

Each of these duties is a fiduciary duty, other than the duty to exercise reasonable care, skill and diligence.

What is meant by ‘fiduciary duty’?

Directors are in a fiduciary position towards their company. The distinction between fiduciary duties and duties derived from other sources is significant in terms of the consequences of infringement, as a breach of fiduciary duty may lead to restitutionary or restorative remedies rather than remedies that are essentially compensatory.

The distinguishing obligation of a fiduciary is the obligation of loyalty.

Directors’ fiduciary duties are linked to their position as ‘stewards’ of the company’s property and affairs.

The courts have provided the following guidance on the responsibilities of a fiduciary:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”

To whom does a director owe duties?

In general, a director owes his duties only to the company and does not, by virtue of being a director, owe any direct duty to either the company’s members or to its creditors. An example of a breach of duties in relation to estate agents occurred when in 2015 a former director of a residential estate was disqualified for seven years. The director had failed to his failure to inform the board and/or to prevent a price-fixing agreement being made and performed amounted to misconduct. The director had breached his duties owed to the company as a director.

When do a director’s duties come to an end?

In general, a director’s duties to the company come to an end when they cease to hold office, but there are two exceptions to this general position. The first is that a person who ceases to be a director continues to be subject to the duty to avoid conflicts of interest as regards the exploitation of any property, information or opportunity of which he or she became aware while a director.

The second, is that a director remains liable not to accept benefits from third parties as regards things done or omitted to be done by him or her before ceasing to be a director. A director who is induced to act in a particular way while in office cannot then resign in order to take a benefit which was promised to him or her to induce him to act in that way.

What are the best practice guidelines for ensuring that directors are aware of their duties?

All companies should take steps to ensure that directors are aware of their duties. This can be done in all or some of the following ways:

  • on appointment, all new directors should be briefed upon their duties;
  • the terms of appointment and description of the role of any director should specifically refer to his/her duties;
  • the terms of reference of any board or committee may also refer to those duties;
  • companies should review their policies in areas such as human resources, ethics, compliance and corporate responsibility against the background of the duties; and
  • providing suitable training on their duties to all new directors, together with suitable refresher courses from time to time.

Michael Budd is Partner and Head of Company Commercial at Longmores Solicitors www.longmores.law 

August 12, 2021

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