Directors' Duties

THE FOLLOWING IS A BRIEF INTRODUCTION TO YOUR RESPONSIBILITIES AS A DIRECTOR.
IF YOU ARE IN ANY DOUBT AS TO THE EXTENT OF, OR YOUR ABILITY TO FULFIL THESE OBLIGATIONS, THEN YOU SHOULD SEEK INDEPENDENT LEGAL ADVICE.

The powers of a director are those delegated to the directors by the Memorandum and Articles of Association of the company, or where appropriate Table A of the Companies Act (“the constitution of the company”). In practical terms a director can do anything that the company can do and the powers of the company are defined in the Memorandum of Association and contained in what is known as the Objects Clause.

As the company has no tangible existence, the management of its affairs is entrusted to its directors. The directors are therefore said to be both trustees, and agents for the company.

Principal Duties

1. Duty to act within their powers

This codifies the common law rules that directors should exercises their powers under the terms that they were granted for a proper purpose. A director’s powers are normally derived from the company’s constitution, i.e. its memorandum and articles of association.

2. Duty to promote the success of the company

This duty is set out in section 172 of the Act. This is a new duty developed from one of the principles of the fiduciary duties, i.e., duty of good faith to act in the company’s best interest.

3. Duty to exercise independent judgement

4. Duty to exercise reasonable care, skill and diligence
This duty is set out in s174(1). It codifies the common law rule of duty of care and skill. s174 (2) prescribes the degree of ‘care, skill and diligence’ expected from a director; that is: care, skill, diligence that would be exercised by a reasonably diligence person with-
a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
b) the general knowledge, skill and experience that the director has
This is the same dual test imposed under s.214 of the Insolvency Act 1986 in the context of a director’s wrongful trading. The first element of the test sets out a minimum objective standard (a hypothetic reasonable person) expected of any director.
The subjective test requires a director to carry out his duty with the general knowledge, skill and diligence he in fact possess. Therefore, a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty.

5. Duty to avoid conflicts of interest
The conflicts of interest provisions are previously contained in Part 10 of the Companies Act 1985 and are quite complex. The Act restates, amends, and simplifies these provisions to make them more accessible and with a view of assisting modern business practice.
Note that this duty applies to a transaction between a director and a third party, such as the exploration of any property, information, opportunity. In other words, the duty does not extend to a transaction between a director and his own company, in respect of which, different rule applies which requires a director to declare his interest to the other directors.
The Act makes it easier for directors to enter into transactions with third parties when directors’ interests conflict with company’s interests. Previously, shareholders’ approval is required to enable directors to enter into transactions with third parties. Now, such transactions can be authorised by the non-conflicted directors on the board provided that certain requirements as listed in s175 (5) (6) including who can participate and vote on such authorisation are complied with.

6. Duty not to accept benefits from third parties
This reinstates the existing rule known as ‘non profit’ in that a director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director.
Benefits cover both monetary and non monetary including for example, non executive directorship and even corporate entertainment. However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. Duty to declare interest
Section 177 of the Act reflects s.317 of the 1985 Act in that it requires a director to disclose his interest to the board of the company when a transaction is proposed between a director and his company. However, it goes further than the requirement of s.317 of the 1985 Act by requiring a director to declare the nature and the extent of the interest to the other directors. Further, disclosure must be made where a director is considered ‘ought reasonably to be aware of’ (s.177 (5)) the conflicting interest. Disclosure also extends to a person connected with the director, for example, his wife and children.
The requirement for disclosure is dispensed in circumstances where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or if other directors are already aware or ‘ought reasonably to be aware’ of the director’s interest.

A director may have additional obligations or duties based on the terms of his service agreement.

Insolvency

A director has additional obligations where a company becomes insolvent, that is where its liabilities exceed its assets or where the company is unable to discharge its liabilities as they become due. There is of course a difference between the company becoming insolvent and the company entering into a formal insolvency process. When a company becomes insolvent the directors need to do everything they can to limit losses to creditors if it appears that there is a prospect of insolvent liquidation. In such a situation a director should not incur further credit. Where wrongful trading can be established, a director will be exposed to the possibility of disqualification from acting as a director and also to the possibility of having to contribute to the amount of any deficiency.