This a large and complex area of law and only an outline can be given here. Reference should be made to one of the leading reference works on company law for a fuller account.
Directors' duties arise in different ways;
General duties under the Companies Act 2006 (came into effect October 2007)
These are largely a statutory restatement of the common law and equitable rules, indeed sec170 says:
(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
(5) The general duties apply to shadow directors where, and to the extent that they are capable of so applying (amended by sec98 of the Small Business, Enterprise and Employment Act 2015).
Note also:
Sec178 (1) The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.
Sec179: Except as otherwise provided, more than one of the general duties may apply in any given case.
Duty to act within powers (1st October 2007)
Sec171: A director of a company must-
(a) act in accordance with the company's constitution, and
(b) only exercise powers for the purposes for which they are conferred.
6.2.2. Duty to act for the benefit of the company (1st October 2007)
Sec172 (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to-
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
6.2.3. Duty to exercise independent judgment (1st October 2007)
Sec173 (1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting-
(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
(b) in a way authorised by the company's constitution.
6.2.4. Duty to exercise reasonable care, skill and diligence (1st October 2007)
Sec174 (1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent 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.
6.2.5. Duty to avoid conflicts of interest (1st October 2008)
Sec175 (1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
(4) This duty is not infringed-
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) if the matter has been authorised by the directors (and the transaction cannot then on this ground be set aside at common law: sec. 180).
(5) Authorisation may be given by the directors-
(a) where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
(b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
(6) The authorisation is effective only if-
(a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
(7) Any reference in this section to a conflict of interest includes a conflict f interest and duty and a conflict of duties.
6.2.6. Duty not to accept benefits from third parties (1st October 2008)
Sec176 (1) A director of a company must not accept a benefit from a third party conferred by reason of-
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A "third party" means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.
(3) Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.
(4) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
(5) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.
6.2.7. Duty to declare interest in a transaction or arrangement (1st October 2008)
Note two separate sections
(a) Proposed transaction or arrangement
Sec177 (1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
(2) The declaration may (but need not) be made-
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with-
(i) sec184 (notice in writing), or
(ii) sec185 (general notice).
(3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.
(4) Any declaration required by this section must be made before the company enters into the transaction or arrangement.
(5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question. For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.
(6) A director need not declare an interest-
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered-
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company's constitution.
(b) Notice of interest in existing transactions
(These provisions largely echo those for proposed transactions, but failure to comply with this one is a criminal offence)
Sec182 (1) Where a director is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section.
This section does not apply if or to the extent that the interest has been declared under sec177 (duty to declare interest in proposed transaction or arrangement).
(2) The declaration must be made-
(a) a meeting of the directors, or
(b) by notice in writing (see section 184), or
(c) by general notice (see section 185).
(3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.
(4) Any declaration required by this section must be made as soon as is reasonably practicable. Failure to comply with this requirement does not affect the underlying duty to make the declaration.
(5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question. For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.
(6) A director need not declare an interest under this section-
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered-
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company's constitution.
Sec183 (1) A director who fails to comply with sec 182 commits an offence.
Sec184: If the declaration is made by notice in writing it is deemed to form part of the proceedings at the next board meeting, and the provisions of sec248 (minutes of meetings of directors) apply as if the declaration had been made at that meeting.
Sec185: a general notice is sufficient declaration if it is given to the other directors to the effect that the director has an interest (as member, officer, employee or otherwise) in a specified body corporate, firm or person and is to be regarded as interested in any transaction or arrangement that may, after the date of the notice, be made with them. The notice must state the nature and extent of the director's interest or the nature of his connection with the person. But a general notice is not effective unless it is given at a meeting of the directors, or the director takes reasonable steps to secure that it is brought up and read at the next meeting of the directors after it is given.
Specific duties under the Companies Act
The Companies Act 2006, the Insolvency Act 1986 and related legislation lay down a regulatory framework for the management and conduct of companies. Many sections of these Acts require companies to send information to Companies House, hold certain meetings, or to do or refrain from certain actions in particular circumstances.
Much of this legislation imposes potential liabilities for non-compliance on the company and, usually, 'on every officer in default'. Directors, along with the company secretary, are the officers who are potentially liable for any such default. Prosecution for regulatory offences (not filing information at Companies House, etc.) is rare, though not unknown.
Potentially more serious are the liabilities which may be incurred on a director personally when a company has become insolvent and it appears that there has been fraudulent or wrongful trading.
Fraudulent trading
Fraudulent trading is where any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose: Insolvency Act (IA) 1986, sec213. This includes where debts have been incurred by a company knowing that they cannot be paid. Note, however, that fraudulent intent must be shown.
Possible court orders:
Any person knowingly a party to the fraud may be made liable to contribute to the company's assets: IA, 1986, sec213(2);
May be convicted and imprisoned and/or fined: CA 2006, sec993;
Directors disqualification order up to 15 years: Company Directors Disqualification Act (CDDA) 1986, sec4
Wrongful trading
This is where a company has gone into insolvent liquidation and it appears to the court that any person who has been a director of the company knew or ought to have known that this would occur and failed to take all reasonable steps to minimise the loss to the creditors: Insolvency Act 1986, sec214.
Keeping a company in a situation where it is trading at a loss, so increasing the deficit to creditors, rather than ceasing to trade or putting the company into liquidation, is clear failure to take such steps. No fraudulent intention is required.
If wrongful trading is established the court may order:
Director liable to contribute to the assets of the company: IA 1986, sec214.
Directors disqualification order: CDDA 1986, sec10.
See also CDDA 1986, sec6: The court may make a directors disqualification order against any person who has been a director of a company which has gone into insolvent liquidation and who appears not to be a 'fit person' to be concerned in the management of a company.
(5) The company may impose duties on its directors by its articles and by delegation by the board of functions to particular directors.
General Law
Directors are responsible for seeing that the company is run lawfully, i.e. in accordance with the general law.
Duties imposed by the company itself
Directors are bound by the terms of the company's articles (which may impose specific duties on them) and by any lawful decisions of the company, whether made by the members collectively or by resolutions of the board.
The Insolvency Service website provides valuable information on the Company Directors Disqualification Act 1985, and the full text of the Insolvency Act 1986 and related legislation. Click here for a link to this site.
See also the Guidance Booklets available on the Companies House website. Click here to link to this site.
