Search

How can we help?

Icon

Director’s duties: A practical example

The ‘General Director’s 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.

About this article

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

Senior Solicitor

View profile

+44 118 960 4613

About this article

Read, listen and watch our latest insights

art
  • 12 June 2024
  • Privacy and Data Protection

UK data protection: Important basics

Sometimes, data protection can seem like unhelpful red tape. At other times, it is critical to cultivating a trustworthy reputation.

art
  • 11 June 2024
  • Immigration

UK Immigration Roundup – May to June 2024

As the UK approaches the upcoming general election, immigration remains a focal issue in political discussions. The Conservative party’s recent proposal to cap visas for skilled migrant workers has alarmed various industries who are concerned that a limit to migration could harm vital sectors of the UK economy.

Pub
  • 06 June 2024
  • Employment

Talking Employment Law: What does the new Worker Protection Act 2023 mean for employers?

In this podcast, Lucy Densham Brown and Shauna Jones, members of the employment team, will review the new Worker Protection Act 2023 and provide some guidance on how employers should review their policies in preparation for October.

art
  • 03 June 2024
  • Commercial Real Estate

Sustainability and commercial property: green leases  

Climate change is considered by many the biggest threat we are facing today. With the UK said to have one of the oldest housing/building stocks, the focus on a building’s environmental performance and sustainability has never been more critical.

art
  • 03 June 2024
  • Employment

Using AI technologies in recruitment: is it fair and transparent?

In a rapidly evolving digital landscape, where artificial intelligence (AI) plays an increasingly pivotal role in HR and recruitment processes, ensuring responsible and ethical implementation is paramount.

Pub
  • 03 June 2024
  • Employment

Navigating the Labour Party’s New Deal for Working People: Legal implications and opportunities

Join Monica Atwal and Amanda Glover, for this in-person seminar on ‘Navigating the Labour Party’s New Deal for Working People: Legal Implications and Opportunities’ at our Reading office on Thursday, 20th June.