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A director of a company inherits a number of significant legal duties under the Companies Act 2006 (the “2006 Act”). These statutory duties under the 2006 Act are “owed by each director to the company” and form the starting blocks of the responsibilities of being a company director.
The first duty is that a director must act “within their powers” under the company’s constitution. The key provisions of a company’s constitution are contained in its articles of association. These articles set out the rules and regulations of a company and include details of the specific powers the directors hold. A company’s articles should be reviewed regularly ensure they remain appropriate as the company evolves.
Directors are also under a duty to “promote the success of the company.” Specifically, a director must act in a way they consider to be “in good faith and would be most likely to promote the success of the company”. Therefore, when a director is making decisions, they must consider the likely consequences of such decisions on the company’s shareholders and its reputation.
The third major duty requires directors to exercise their independent judgement. This can only be achieved if directors develop their own informed view on a company’s activities, and ignorance is not a defence under the 2006 Act.
A director must also “exercise reasonable care, skill and diligence”. The general expectation of directors today is that of a diligent individual with the general knowledge, skill and experience that could “reasonably be expected from a person carrying out the director’s functions”.
The remaining legal duties relate to the need for directors to avoid and/or manage conflicts of interest which may affect their objectivity. Gifts or benefits received from third parties are considered a potential threat to a director’s impartiality. Directors do have a statutory duty to disclose any and all direct and indirect interests in proposed and existing transactions or arrangements with the company.
If situations arise where a director could potentially be conflicted/interested, i.e., where a director has a relationship of a business or personal nature with persons or entities that are affected by the company’s activities, it is essential that such interests are disclosed to fellow directors. It is then the task of any non-conflicted board members (or shareholders, in some cases) to decide how to manage or approve the conflict and maintain the integrity of the board’s decision-making processes.
So, how can a director prove that they are complying with these legal duties?
Pursuant to the 2006 Act, companies are required to keep minutes of every directors’ meetings, for a period of ten years from the date of each meeting. These minutes provide a record of the board’s decision-making processes. As such, minutes can provide vital evidence that a director/board of directors duly considered their duties under the 2006 Act.
If you or your business require information regarding anything covered in this blog or generally in relation to any other corporate matter, please call our Corporate Team for advice and assistance.