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Director’s duties: A practical example

The ‘General Directors Duties’ are still seen by many as the pillars of correct corporate governance. Codified in the Companies Act 2006, these duties apply to executive, non-executive, shadow directors and de-facto directors.

Many companies are still unaware of how these duties work in practice.

For example; a company has two shareholders and directors, who are old friends and appoint another Director (and as shareholder) of the company. To begin with all goes well, but, after 18 months, the appointed Director stops putting in any effort and begins to fail to attend the office or meetings (including board meetings).

Things deteriorate further and it is discovered that the Director has set up his own company and is diverting business opportunities that could be very appropriate from the first company  to his new company.

Action

Under the 2006 Act, a director has several general duties:

  1. Act within his powers (so act in accordance with XYZ Ltd’s constitution and only exercise his powers for their proper purpose)
  2. Promote the success of XYZ Ltd
  3. Exercise independent judgment
  4. Exercise reasonable care, skill and diligence
  5. Avoid conflicts of interest
  6. Not to accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director
  7. Declare interests in proposed transactions or arrangements with XYZ Ltd

From the limited information given above, he could well be in breach of several of these general duties by setting up a competing company and directing clients away from his first company.

By doing these things, the director is almost certainly failing to promote the success of the first company.  Six factors underpin this duty, and a director is required to have regard to all of these:

  • The likely long-term consequences of any decision
  • The interests of employees
  • The need to foster business relationships with suppliers, customers and others
  • The impact of the company’s operations on the community and the environment
  • The desirability of maintaining a reputation for high standards of business conduct
  • The need to act fairly between members

Under the 2006 Act, a director has several general duties.

The Director is also in breach of his duty to avoid a conflict of interest. A director must avoid a situation in which he or she ‘has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests.’ This is very broad and covers both actual and potential conflicts and direct and indirect interests. It applies both to a conflict of interest and a conflict of duty, as the Director:

  • Has an interest in a commercial opportunity that could also be exploited by the company
  • Is, apparently, using, for his own purpose, information belonging to the company

The consequences of a breach of the 2006 Act duties are the same as for breach of the corresponding common law or fiduciary duties.

Action by the company

The duties are owed to the company will be able to enforce them, although in certain circumstances shareholders can bring a derivative action on behalf of a company. Such an action may be brought in respect of negligence, default, breach of duty or breach of trust by a director of a company. This means that a derivative action may be brought in respect of alleged breach of any of the 2006 Act general duties of directors.

Removal of a Director

Whatever the circumstances, shareholders always have the right to remove a director by shareholder resolution. That right is enshrined in statute and cannot be taken away by a company’s articles. However, the director’s employment rights will, be unaffected by the shareholder vote – so he or she may still have a claim for wrongful and/or unfair dismissal.

Reminder of Directors duties

After a hostile and tough economic climate in 2020 and 2021, it is also important to remember that the general director’s duties will also survive a company’s entry into administration. The judgement in the high court case Re Systems Building Services Group Ltd [2020], serves as a timely reminder that such duties are independent of, although will likely act alongside, the duties any appointed administrator or liquidator.

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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

Jacob Montague

Solicitor

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+44 118 960 4613

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