English Law dictates how company directors should act. Many directors we have spoken to believe they are the company and the company is them, considering themselves as the ‘owner’. Although commendable, the law does not see it that way.
In law, a company is considered a separate legal ‘person’ and can do things as any other ‘person’ does, such as:
- Enter into agreements
- Bring court proceedings
- Own property
Therefore, directors have duties towards the company and are in their roles to serve it.
Companies Act 2006
The UK Government introduced the Companies Act 2006 to simplify company administration and improve shareholder rights. It dictates that directors have a ‘fiduciary’ relationship with a company and particular duties they must fulfil whilst carrying out their role.
What is a Fiduciary Relationship?
‘Fiduciary’ means a special relationship of trust. For example, looking after the savings of an elderly parent, making sure they are spent in their best interests.
A good way of understanding directors’ duties is to imagine the company you ‘own’ is like a disabled relative whose finances and business you manage as they cannot do it themselves.
Who Owes Fiduciary Duties to the Company?
Even if directors are not registered with Companies House, they all have fiduciary duties towards the company, including:
- Directors, both executive and non-executive, registered with Companies House
- ‘De Facto’ directors - a person who acts and is treated as a director, though has not been appointed or registered as such
- ‘Shadow’ directors - those who give instructions to directors
The Company Directors’ Duties
In a broad sense, the statutory rules are based on the fiduciary relationship. The relevant sections in the Companies Act 2006 say that Directors must:
171: Act Within their Powers
Directors must act within the powers of the company’s constitution and only use them for their intended purpose.
172: Promote the Success of the Company
Directors must promote the company’s success for all its members. Whenever they act, they should consider the short and long-term consequences relating to:
- The employee’s interests
- Your community and environmental impact
- Business relationships with customers, suppliers and other relevant parties
- Fairness between members
- The company’s reputation for good business and conduct
173: Exercise Independent Judgement
Directors should use their power independently, considering all company members equally.
174: Exercise Reasonable Care, Skill and Diligence
Directors should act as a reasonably diligent person who demonstrates:
- The knowledge, experience and skill that could be expected of a director
- And directors’ actual knowledge, experience and skill
175: Avoid Conflicts of Interest
Directors must avoid situations where they have direct or indirect interests that conflict or could conflict with the company’s interests.
176: Not Accept Benefits from Third Parties
Directors must not accept any benefits from third parties that are granted as a result of their position as the company’s director or their actions in the role.
177: Declare an Interest in any Proposed Transaction or Arrangement with the Company
Directors must divulge interests (whether direct or indirect) in any proposed company transaction or arrangement. Section 182 obligates them to declare interests in existing transactions and arrangements.
Consequences of Breaching Your Duties
Breaching directors’ duties can significantly damage the company, for which it will want compensation. Here are some of the avenues available to the company:
Removal
The company’s shareholders can vote for the director’s removal by achieving at least a 50% majority. However, the director must receive the opportunity to make their representation in the meeting. The company’s constitution should determine this process.
Interim Injunction
The courts can issue an interim injunction to halt directors’ actions that breach their duties, reducing the risk of potential damage and losses.
Shareholder Litigation Action
Shareholders can take litigating action against a breaching director if they believe other directors will support the guilty party. However, this process is complex and can be costly.
Recovering Financial Losses
If the company suffers financial losses from a director’s breach of duties, it can pursue them through the courts to recover these damages.
Transactions Set Aside
If a director fails to declare their conflict of interest in a transaction, it can be set aside and the company property can be retrieved.
Instruct our Director’s Liability Solicitors
If you need help pursuing director liability claims, contact our expert Corporate Crime and Criminal Allegations team today.
Featured image: Pexels Licence - Tima Miroshnichenko
