A director of a company must comply with a variety of laws and regulations. Amongst those, the Companies Act 2006 imposes seven general duties on directors. But what are these general duties and what do they mean in practice?
Does this apply to me?
If you’re a director and you’re wondering whether the general duties apply to you, the short answer is probably yes! The general duties apply to all directors of a company and ‘a director’ is defined as any person occupying the position of a director by whatever name called. There are several different types of directorship:
- an executive director (usually a full-time employee who carries out executive functions in the day to day running of the company’s business)
- a non-executive director (a director who is not an employee or holder of an executive office);
- a ‘de jure’ director (a validly appointed director);
- a ‘de facto’ director (a person acting and treated as if they are a director but without having been validly appointed); and
- a shadow director (a person in accordance with whose directions or instructions the directors of a company are accustomed to act).
So, if you’re acting as a director in one of these capacities, the general duties will apply to you.
The Magnificent Seven
Here’s a brief overview of the seven general duties:
Duty to act within powers
A director must act in accordance with the company’s constitution (primarily, its articles of association) and only exercise powers for their intended purposes.
Duty to promote the success of the company
A director must act in a way she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Whilst considering this, a director must consider (among other things):
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
This duty applies to all decisions made by a director and not just formal decisions taken by the whole board.
Duty to exercise independent judgment
A director must exercise independent judgment. This would not prevent a director from relying on third party advice as long as the director exercised her own independent judgment when deciding whether to follow that advice.
Duty to exercise reasonable care, skill and diligence
A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may be reasonably expected of a person carrying out those functions which would be carried out by a director in relation to the company; and
- the general knowledge, skill and experience that the director has.
In other words, the higher skilled a director you are, the higher the level of skill and expertise you would be expected to exercise.
Duty to avoid conflicts of interest
A director must avoid a situation in which she has or could have a direct or indirect interest that conflicts with, or may possibly conflict with, the company’s interests. The test for whether there is a breach of duty here is an objective one. So it wouldn’t matter whether or not a director was aware that she was breaching this duty.
Importantly, this duty continues to apply even after a person ceases to be a director in respect of the exploitation of property, information or opportunity of which they became aware when they were a director.
Duty not to accept benefits from third parties
A director must not accept any benefit from a third party which is given because of that person being a director. ‘Benefit’ is not defined here but should be given its usual meaning of including a favourable or helpful factor, circumstance, advantage or profit. It would also include a bribe. Again, this duty continues to apply even after a person ceases to be a director.
Duty to declare interest in proposed transaction or arrangement with the company
A director must declare the nature and extent of any interest (direct or indirect) that she has in a proposed transaction or arrangement with the company. Importantly, the director need not be a party to the transaction for this duty to apply.
The declaration must be made to the other directors, either at a meeting of the directors or by notice in writing. In each case, however, it must be made before the company enters into the relevant transaction or arrangement.
So now you know what the general duties are, but what happens if you accidentally breach them? Watch out for our next blog which will explain the consequences of breaching the general duties and the steps directors can take to protect themselves. And remember, as a director in addition to these seven duties you are subject to many other specific obligations, rules and requirements!