The directors of a company have day to day responsibility for the running of the business, its strategic direction, and decisions relating to operational management. They also owe a number of statutory duties to the company which are set out in the Companies Act 2006.

Breach of these duties could have severe consequences and this blog looks in more detail at what those statutory duties are and who they apply to.

Who do the statutory duties apply to?

As well as statutory directors (registered at Companies House formally as de jure directors of the Company) there are also de facto directors. There are people who are treated as if they were formal directors, and indeed act as such, but have not been formally appointed.

Confusingly, there are also what are known as shadow directors. A person might well be deemed to be a shadow director by reason of the board being accustomed to act on that person’s direction or instruction. There is potential overlap here with a de facto director.

Both de facto and shadow directors also owe the same duties as statutory directors.

Statutory duties of a director

The Companies Act 2006 (CA 2006) entrenched the common law and equitable duties for directors into statute for the first time. The key seven statutory duties are as follows:

1. “to act within powers” (section 171). This provides that a director must only use their power for its proper purpose and within the scope of the company’s constitution. This is widely defined and includes the articles of association. Simply put a director has a duty not to abuse their position.

2. “to promote the success of the company” (section 172). A director of a company “must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members”. There is uncertainty over the definition of certain terms for example “success”. The directors should, though, have regard to factors including, but not limited to:

The likely long term consequences of any decision;

• The interests of the employees of the company;
• The need to develop relationships with suppliers, customers and others;
• The impact on the community and the environment;
• The company maintaining a good reputation; and
• The need to act fairly as between the members of the company.

3. “to exercise independent judgment” (section 173). This does not prevent a director taking expert advice, as long as the director exercises his or her own judgment when introducing advisers to the company, considering the advice and whether or not to follow it. Equally, it does not present a director acting pursuant to an agreement entered into by the company which may restrict his or her future discretion on certain matters.

4. “to exercise reasonable care, skill and diligence” (section 174). This is with regard to a “reasonably diligent person” and there are two stages in assessing this;

      a) firstly objective – the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company

      b) secondly subjective (particularly where the director has specialist knowledge for example the finance director) – the general knowledge, skill and experience that the director has.

5. “to avoid conflicts of interest” (section 175). This replaced the “no conflict” rule applying to directors. The test as to whether this duty has been breached does not depend on the director’s awareness and is entirely objective. The duty particularly relates to the exploitation of property, information or opportunity. Authorisation may (subject to the constitution of the company) be given by the other directors at a board meeting in relation to the conflict. Importantly, this section does not apply to conflicts arising in relation to transactions or arrangements with the company, which are covered by sections 177 and 182.

6. “not to accept benefits from third parties” (section 176). This means that directors have a strict duty not to exploit their positions as a director for personal benefit (including bribes) unless that benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. “declare interest in proposed transaction or arrangement with the company” (section 177). Any such interest, its nature and extent must be declared to the board. If the constitution of the company permits it, a director who has made a declaration may continue to participate in decision making relating to the transaction but the declaration must be made before the arrangement is entered into.

The company has the ability to enforce these duties and, in some circumstances, the members of the company may also be able to bring certain actions on its behalf. A breach could result in an injunction being sought, the transaction being set aside, and damages being payable. It could also result in dismissal or disqualification as a director.

For further information on  please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com