Under sections 170 – 181 of the Companies Act 2006, directors have general duties which are owed to the company.
To act within powers
The powers of directors are contained in a company’s constitution (i.e. its articles of association).
Directors must act in accordance with the constitution, and only exercise their powers for the purpose(s) for which they’re conferred. It goes without saying that directors should be familiar with their company’s constitution.
To promote the success of the company for the benefit of its members (shareholders) as a whole
This is set down by section 172 of the Companies Act 2006.
In promoting the success of the company, directors must have regard to the following:
- 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 the environment;
- the desirability of the company maintaining a reputation for high standard business conduct; and
- the need to act fairly as between members of the company.
This is a duty owed to the company to promote success for the benefit of the members as a whole. The directors must decide, exercising their own judgment in good faith, what is most likely to promote the success of the company and what weight to give to each of these factors (eg, some may be irrelevant in a given case).
To exercise independent judgment
Directors are required to act independently. Although directors may obtain advice, they must exercise their own judgment on whether or not to act in accordance with it.
To exercise reasonable care, skill and diligence
In carrying out their responsibilities, directors must exercise reasonable care, skill and diligence. This is set down by section 174(1) which says:
A director of a company must exercise reasonable care, skill and diligence.
Section 174(2) explains that:
This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a)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, and
(b)the general knowledge, skill and experience that the director has.
This therefore sets an objective standard of what would reasonably be expected generally of someone performing the director’s functions.
This is then supplemented and raised by a subjective standard which takes into account the general knowledge, skill and experience that the director actually has.
To avoid conflicts of interest
This duty is set down by section 175(1), which says:
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
Directors must avoid any situation in which there is an actual conflict and also situations where their interests may possibly conflict.
In many RMCs, directors are also members of the company. Conflicts (or potential conflicts) will need to be carefully considered.
Not to accept benefits from third parties
This duty is set down by section 176, which says:
(1) A director of a company must not accept a benefit from a third party conferred by reason of—
(a)his being a director, or
(b)his doing (or not doing) anything as director.
Section 176(2) explains that a “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.
To declare interests in transactions or arrangements with the company
This duty is set down by section 177(1), which says: If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
Additionally, section 177(4) makes clear that any declaration required must be made before the company enters into the transaction or arrangement.
The constitution of a company typically includes further provision as to how relevant conflicts of interest should be managed, for instance, regarding voting on proposed relevant transactions.
Keeping a record
It’s becoming more common for members to challenge the decision making of directors. So how can a director prove they’ve fulfilled these legal duties?
One of the important purposes of the minutes of board meetings is to provide a record of the board’s decision-making process.
Board meeting minutes serve as an official and legal record of the meeting of the board of directors. Minutes serve as a reference point and, amongst other things, should reflect a record of motions, votes, and abstentions.
Section 248 of the Companies Act 2006 requires these minutes to be kept for 10 years. It is a criminal offence under section 248(3) if this is breached.