5 October 2023

The Lifecycle of a Business - What are my duties as a director?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

What are my duties as a director?

Whether you’re the sole director of a small owner-managed company or the CEO of a multinational enterprise, you’ll be subject to various duties and obligations and it’s imperative that you’re aware of these before you’re appointed and remember them throughout your directorship (and in some cases, after it ends as well). For further guidance as to what to consider before becoming a director, see here.

What are a director’s duties?

The general duties of a director of a company are set out in the Companies Act 2006 (CA 2006) and all directors must abide by these. These are discussed in more detail below.

In addition, a company’s articles of association (the articles) may include additional obligations and further duties are set out in other legislation and case law which may be relevant, for example, health and safety law, environmental law, accounting requirements and so on. It’s also worth bearing in mind that where a director is an employee of the company, they’ll also be bound by the terms of their contract of employment.

General duties of directors

Set out in the CA 2006, the general duties should be considered by directors whenever they make any decisions or act (or decide not to act) in their capacity as a director. The duties are owed to the company, not to, for example, shareholders. More than one general duty may apply at any given time and breaching one duty to comply with another is no defence.

Further guidance about what directors should and shouldn’t do to comply with these duties can be found here.

  1. Duty to act within powers (section 171, CA 2006) - Directors must only act in accordance with the company’s constitution (i.e. the articles) and exercise their powers only for the purposes for which they’re conferred. This latter part will depend on the circumstances in question but basically directors mustn’t exceed the scope of their powers.
  2. Duty to promote the success of the company for the benefit of the members as a whole (section 172, CA 2006) - Probably the most significant of the general duties, this should be at the forefront of every director’s mind when making company-related decisions. The provision includes a non-exhaustive list of factors which directors should consider, including the likely long-term consequences of any decision, the need to act fairly between members, employees’ interests and the impact on the community and environment. This latter point is highly topical with ESG being an important consideration for many businesses. That said, this doesn’t mean that a company’s actions must only be beneficial to the environment and we’ll cover this in more detail in a future article.
    It's not always necessary for the board to fully document their discussion of these various factors although board minutes should always record that they’ve at least been considered. However, where a decision is or may be contentious, then it’s probably worthwhile to include more detail as to the factors considered and the reasons behind the end-decision, so that there’s a paper trail should questions arise at a later date.
    The legislation doesn’t define “success”, although for most businesses it’s likely to mean long-term profitability. However, for some companies, charities for example, this may not be the objective.
  3. Duty to exercise independent judgement (section 173, CA 2006) - Directors must make their own decisions after taking into account the circumstances and any relevant factors. This isn’t to say that external advice can’t be taken; in fact, in some situations where specialist expertise is required, a director could be in breach of their duties by not taking such advice, but the director has to come to their own decision after taking any such advice into account. Nor does this duty prevent delegation; this wouldn’t be feasible unless the company was very small, but delegation doesn’t absolve any director of responsibility.
    This duty can cause difficulty between board members and a junior director may find it difficult to openly disagree with a more experienced member of the board, but taking a collective line simply because it’s expected rather than because you agree with it, would be a breach.
  4. Duty to exercise reasonable care, skill and diligence (section 174, CA 2006) - There are two levels to this duty – objective and subjective. A director must use the care, skill and diligence that would be expected of any director in making a decision (objective). However, if that director has a particular skill or expertise, then that will also be taken into account (subjective). So, for example, if a director has 20 years of experience as an accountant, they’d be expected to bring that expertise to bear in relation to reviewing the company’s accounts.
  5. Duty to avoid conflicts of interest (section 175, CA 2006) - A director must avoid any situation in which they have or could have a direct or indirect interest that conflicts, or could conflict, with the company’s interests. If, for example, a director holds directorships in a number of companies, his use of information regarding the property, for example, of Company A for the benefit of Company B would be a breach of this duty.
    Case law has provided that this duty continues to apply even after a director has resigned (see here). An obvious example of this is where a director resigns from Company X to work for Company Y and uses the information he acquired while a director of Company X to further Company’s Y’s business.
    Often, the company’s articles will permit the independent (i.e. non-conflicted directors) to authorise any such conflict although you must ensure that there is still a quorum (minus the conflicted director) to do this. The articles of a company may provide for a different quorum for directors’ meetings to approve any conflicts. Failing that, the members may be able to authorise.
  6. Duty not to accept benefits from third parties (section 176, CA 2006) - Essentially an anti-bribery duty, a director mustn’t accept any benefit if it’s given because of their position as a director or in relation to their acting (or not acting) as a director in a certain way. “Benefit” isn’t defined and so common sense is required here. Clearly, a director involved in the tender process for a large piece of work shouldn’t be accepting gifts from one of the bidder entities, although accepting a working lunch invitation from your legal advisor to discuss a transaction that they’re advising you on is probably fine. A company’s articles or anti-bribery policy may include further detail as to what’s acceptable.
  7. Duty to declare an interest in a proposed transaction (section 177, CA 2006) - Any director who has an interest in a transaction which the company proposes to enter into must declare that interest as soon as possible. For example, if Company E intends to acquire the shares of Company F and a director of Company E is a shareholder in Company F, this must be declared to the board of Company E. The declaration need only be given once.

What happens if a director is in breach?

A breach of any of the above duties can have various, potentially serious, consequences. As mentioned, the duties are owed to the company and so it’s the company who’ll bring any claim against a defaulting director. That said, members are, on occasion, able to bring a derivative claim on behalf of the company.

Remedies may include damages, the granting of an injunction to stop the director from acting in a certain way or requiring the director to account for profits. Directors in breach may also have their employment terminated and be disqualified from acting as a director in the future. The damage to a person’s reputation should also not be underestimated.

While resigning from your position as a director may seem like a sensible option if there’s been a breach or if you’re not happy with the decision-making of the rest of the board, care should be taken as such a step may not solve the problem and in certain situations, could make it worse.

You should take legal advice as soon as possible if you think that you may have breached or are in breach of a duty or if you suspect that another director has done so.

Disclaimer

This note reflects the law as at 5th October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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