Directors' Duties: Ignore them at your peril!
PUBLISHED: 17:44 27 January 2015 | UPDATED: 17:44 27 January 2015
Running a company has become a complex business, keeping up with the myriad of legislative changes and Colin Witherall, Head of Commercial at Brethertons LLP takes a look at the issues…
A company is a separate legal entity which means that it has duties and obligations in its own right and is not simply the embodiment of the owners (shareholders) or the managers (directors).
Shareholders’ rights and obligations are set out in the Articles of Association of the company and their liability is limited to their obligation to pay for their shares. They have the ultimate management power to remove the directors.
The management of the company is almost exclusively the domain of the directors and, consequently, they have a number of duties and obligations which could, potentially, involve them in personal liabilities. Their liability it is not limited.
Those duties and obligations also extend to non-executive directors. You do not have to be appointed as a director to assume those duties and obligations, you simply need to carry out the role. If you use the title “director” you could be a de facto director or if you influence or take fundamental decisions for the company you could be a shadow director.
Under the Companies Act 2006, for the first time, director duties were defined. A director must: exercise reasonable care and skill, act within their powers, exercise independent judgement, not accept thirdparty benefits, declare their interests, promote success and avoid conflicts. The principal obligation is to act in the best interests of the company.
Under the common law there are a variety of similar duties and legislation such as the Insolvency Act, Bribery Act, Health & Safety at Work Act impose personal obligations on directors.
Directors must protect themselves by having an awareness, by training or otherwise, of their obligations. They need to understand core documentation such as the Articles of the company. They should create clarity as to their obligations by having a director’s service contract. Practical measures such as putting in place Directors and Officers insurance should also be taken.
The essential role of the director is one of risk management and that includes risk management for the company and for themselves. If you have any queries about the content of this article, I’d be delighted to speak to you.
Colin Witherall - Associate – Head of Commercial