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Directors' Duties under the Companies Act 2006

Tuesday, 4 October 2011

The role of company director carries with it very serious responsibilities, in the form of the duties which a director owes to the company and its members as a whole. The scope and nature of these duties have historically been defined by decisions of the courts. Now, the Companies Act 2006 has brought together these historical legal principles and with a view to making law more accessible, the Act sets out at sections 171 to 177 the general duties a company director must observe.

If you are a director of a private or public company, or a shadow director, it is important to be aware of the general directors' duties because there are consequences of acting in breach of them, including a civil claim for damages or disqualification from the office of director.

The general directors' duties set out in the Companies Act 2006 are as follows:

· A director has a duty to act within his or her powers:

A company's constitution sets out rules about a director's powers and how they are to be exercised; directors should familiarise themselves with the constitution and observe its rules.

· A director has a duty to promote the success of the company:

Directors are duty bound to act and take decisions having regard to the company's best interests, for the benefit of the members as a whole.

The general duty to promote the success of the company must be exercised bearing in mind a number of factors, including the interests of the company's employees and the impact of the company's operations on the community and the environment.

· A director has a duty to exercise independent judgment:

Directors should exercise independent judgment and should not blindly follow the views or directions of others without considering what is in the best interests of the company.

· A director has a duty to exercise reasonable skill, care and diligence:

The level of skill, care and diligence required will depend upon the qualifications and experience of the particular director, however even directors lacking high levels of qualification and experience are expected to exercise the skills of a reasonably competent person occupying their position.

· A director has a duty to avoid conflicts of interest:

Unless specifically authorised by the board, directors must remove themselves from situations where they have a conflict of interest or may have a conflict of interest. In other words a director must not put his or her own personal interests ahead of the interests of the company by, for example, personally exploiting information or an opportunity gained through their position as director.

· A director has a duty not to accept benefits from third parties:

Directors must not accept benefits, such as personal gifts or payments offered to them because of their position of director. Extremely minor benefits may be permissible, but directors should ensure that they do not accept benefits not allowed under the company's constitution.

· A director has a duty to declare any personal interest in a proposed transaction or arrangement with the company:

Any direct or indirect personal interest a director may have in a proposed transaction involving the company must be declared to the other directors and the manner in which the declaration must be given is set out in sections 182 to 187 of the Companies Act 2006.

For more information on directors' duties under the Companies Act 2006 or to speak to one of our company and commercial law solicitors, please contact us via e-mail or by phone on 0207 611 4817.