The Companies Act 2006 codifies Directors duties. The duties are owed by both formally appointed Directors and those who are not recorded as Directors – but who act as if the were – known as “shadow directors”. The general duties are:-
Duty to act within the company constitution powers: in other words Directors must be familiar with and act within the limits of the companies objects clause and notices of association.
Duty to promote the success of the company: Directors must act in the long-term interests of the shareholders but must also have regard to, for example, the interests of the employees, and the impact of the company upon the community and the environment.
Duty to exercise independent judgment: Directors must use independent judgment – they may of course take appropriate expert advice.
Duty to exercise reasonable skill, care and diligence: The level of skill to be expected from a Company Director is the higher of:-
i) the knowledge and skill of a person carrying out the same duties as the Director or;
ii) the knowledge and skill that the Director actually has.
The level of skill required from a lay Director will vary according to the size and complexity of a company’s affairs. A Director with professional skills must apply the level of skill attributed to his/her profession.
Duty to avoid conflicts of interest.
Duty not to accept benefits from third parties.
Duty to disclose interests.
Breach of these duties is a civil not a criminal matter. The Director owes the duty to the company and it is therefore for the company to enforce these in the first instance. Remedies available to a company for breach of duty by Directors may include:-
- Rescinding (nullifying) contracts entered into where a Director has failed to disclose an interest.
It is possible for Directors (or the company in their behalf) to purchase insurance to indemnify Directors against liabilities arising from breach of these duties through negligence.