ABSTRACT
Directors are the people who officially manage the daily operations of the company in the United Kingdom. The Companies Act 2006 regulates certain duties that the directors must follow for a lawful management of their company. It is essential for people who intend to become a director to know a brief of these duties.
Key words: Director, Duties of Directors, Company Management in England, Companies Act 2006, Promote the Success, Independent Judgement, Reasonable Care, Breach of Duty, Relief from Duty
INTRODUCTION
For the Companies House, the regulator of companies in the United Kingdom, a director of a company is probably the most essential person in the company. A director is formally registered under the name of the company and is the contact point of the Companies House for any issue and shows authority. The directors can be more than one and they carry all the day to day activities of the company. In short, being either a legal or real person, directors are the people who manage the company. The details of the directors are transparent to any viewer under the Companies House webpage, except for some extraordinary circumstances.
The Companies Act 2006 ("Act") regulates the rules on all kind of company matters in the United Kingdom. The Act is very detailed consisting of 47 Parts, 1300 Sections and 16 Schedules. Any director managing a company should be familiar with the terms of the regulator Companies House and the regulation The Companies Act 2006 on the daily management of the company.
According to the Act, the shareholders of a company and the directors of a company have separate duties and responsibilities. The shareholder of a company can be a director under a company, however, it is not essential. The important part to note is that the duties of the directors are higher than the shareholders.
DUTIES UNDER THE ACT
Under the Companies Act 2006, the 7 general duties of the director are listed and a brief description is provided in sections 171 to 177 for the duties of the directors under a company.
Duty to Act within Powers (S171)1
The directors are bound to practise their powers in accordance with the Articles of Association ("AoA") of the company, which should also be open to public on the Companies House website. The Act calls the AoA as the 'company's constitution'.
Most companies in the United Kingdom practise with the model AoA which sets the general rules for the company management and the board. Companies are free to create their own AoA by either changing the provisions of the model AoA or creating an AoA from scratch. Any change requires a good level of understanding of the Act for the provisions not to be in contradiction with the regulations, and should be done by lawyers.
It is advised that the directors go through the AoA of the company to build an understanding of their duties and power when running the company. The Act states that the directors must act in accordance with the company's constitution and only act within the powers conferred to them.
Duty to Promote the Success of the Company (S172)2
Although the term 'promote the success' sounds a bit ambiguous, and improving the business of a company seems to be a regular duty expected from a prudent director anyway; the Act puts the duty on the director by drawing a wide range for directors to consider when promoting the success of their company. The Act requires the director to act in a way he/she considers, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders. The Act also states that, the directors must also consider the consequences of their decision, and the effects of these decisions to their employees, suppliers, customers and others. The impact of these decisions to the environment, the community and the reputation of the company are also stated by the Act to be considered. Therefore, it can be seen that the Act does not see it as a simple duty when saying 'promote the success' and asks the directors to consider numerous elements when managing the day to day operations of the company. This duty is clearly beyond a mere financial success.
Another essential point to know here is that since 2019, companies with more than 250 employees must provide explanation in their annual financial report on how their directors fulfilled this duty.
Duty to Exercise Independent Judgment (S173)3
Independent judgement is a very straightforward duty on the directors requiring them to use their sole discretion on the decision they should not imprudently follow an advice and use their own independent discretion. If there is more than one director, this duty separately relies on each director and one director cannot avoid responsibility by relying on the decision of another or the directors cannot agree to act in a certain way.
The Act also states that the directors acting in accordance with an agreement the company has signed or under the limitation of the AoA will not infringe this duty.
Duty to Exercise Reasonable Care, Skill and Diligence (S174)4
In short, this means that the director of a company should be competent to carry the duties with a reasonable amount of care, skill and diligence. It also means that every director appointed to the company has to show the reasonable amount of care to the daily management and decision making of the company and a director should not be appointed just for their name or reputation.
The minimum standard of care is expected from directors while practising their duties and it is only expected for them to act as a reasonable businessperson. However, if the director is someone with specialist knowledge such as an accountant or a solicitor, the expectations also increase and higher level of care and diligence is expected from such directors. Although it is not expressly stated in the Act, an important duty of the directors under this clause is to follow the annual financial statements of the company and keeping the records of any decision.
Duty to Avoid Conflict of Interest (S175)5
When managing their businesses, a very important aspect stated by the Act is that the directors must not in any case act within their own personal interest. The Act has regulated three separate duties on this, which the first making in relation to their powers. A director must not act as an agent or a delegate of someone else, especially of the major shareholders. This does not of course prevent directors from taking advice from third parties, but it means that when giving the final decision, is to avoid a situation where their personal interest has a conflict with the interest of the company. The Act clearly states that any direct or indirect interest of the directors falls under this scope and directors should be very careful for either actual or possible conflicts.
In a large company management, conflict of interests may become inevitable and, in these cases, the director's duty is to act loyal to the company and disclose any direct and indirect conflict to other board members and act in accordance. The other directors have the right to decide on a potential solution for the conflict by either accepting or rejecting it. The other board members must be careful the follow the provisions of the AoA on this decision making as, their consent is only possible if it is permitted under the AoA.
Duty not to Accept Benefit from Third Parties (S176)6
The Act puts an extra duty on the directors not accept any kind of benefit from third parties that may affect their impartiality and objective decision making. The limits for this is that the benefit should directly or indirectly in relation to them being a director. In addition, if the gift does not arise any doubt of a potential conflict of interest, then the Act notes the gift does not infringe this duty.
In practise, there may be situations where it is difficult for the directors to decide if the gift is in relation to their work or directors may see the amount of gift too small to fall under scope. To prevent any uncertainty, it is advised that the companies have a gift and hospitality policy to draw the lines.
Duty to Declare Interest in Proposed Transaction and Arrangements (S177)7
Duty to declare any interest in transactions can be read together with duty to avoid any conflict. If it appears to be that the director will have any kind of interest in a transaction or arrangement of the company, the director should disclose this to other board members. This can be a notice in writing or a declaration made in a board meeting.
BREACH AND RELIEF
The Act further regulates the consequences of any breach of the duties in S171 to S177 and notes that the company, as the entity which suffers from the breach, has rights to take action against the director in breach.8 One or more shareholders also have the right to make a claim against the director in breach, if they are in belief that they have personal financial loss.
By considering the results of the breach, there are numerous options for the company can take from merely just removing the director from office to taking criminal action against the director. In general practise, the claim only covers claims for financial loss and damage, returning company property and injunctions against the director.
As a relief from any breach of the director, there are 3 possible ways for the director to come clear of any claim.9 If they are authorised under the AoA, the non-breaching directors can authorise the action of the director in breach. In addition, the shareholders of the company can ratify the breach of the director with a general assembly resolution. When the shareholders ratify the breach, the company loses its rights to take legal action. Finally, the director can ask for a relief from the court by proving that his action was honest and reasonable in those circumstances.
CONCLUSION
The Act and the AoA puts high level of duties on directors, which may become alarming for people who intend to become directors of a company in the United Kingdom. However, the regulations are there to remind the directors how valuable their work is towards the society and in brief, there are two humanly qualities expected from a director; honesty and reason-ableness. An honest, reasonable and prudent businessperson who has a basic level of understanding of the Act and the AoA can successfully manage a business as a director. It is only advised that they stay in contact with a lawyer and have a professional accountant for any kind of commercial and corporate issue to stay on the safe side.
Footnotes
1 https://www.legislation.gov.uk/ukpga/2006/46/section/171
2 https://www.legislation.gov.uk/ukpga/2006/46/section/172
3 https://www.legislation.gov.uk/ukpga/2006/46/section/173
4 https://www.legislation.gov.uk/ukpga/2006/46/section/174
5 https://www.legislation.gov.uk/ukpga/2006/46/section/175
6 https://www.legislation.gov.uk/ukpga/2006/46/section/176
7 https://www.legislation.gov.uk/ukpga/2006/46/section/177
8 https://www.legislation.gov.uk/ukpga/2006/46/section/178
9 https://www.legislation.gov.uk/ukpga/2006/46/section/180
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