Directors’ responsibilities

Directors’ powers

Subject to a company’s articles of association, company law and any contract with the directors, the directors have day to day control and management of a limited company. In many small or family companies the directors are also the shareholders.

The director is given an authority to act on behalf of the company and manage its affairs. The powers are granted to directors by the Articles of Association which contain the provisions regarding the scope of directors’ authority. The director has only got powers that the company has given him.

A director of a company has got several statutory duties and obligations imposed on him or her by the law, which he or she owes to the company.

What are the directors statutory  duties?

Examples of directors’ duties include:

  • Duty to act within  powers: the directors need to act for the proper purpose and bear the company’s benefit (and not their own) in mind in every business decision they make. They cannot use their position as a director to act in their private interest.
  • Duty to promote the success of the company: the director needs to bear in mind the interests of the company and its shareholders when making  decisions, investments, negotiating contracts with clients or contractors etc. He or she must act fairly and take care of the good reputation of the company and the company’s growth.
  • Duty to exercise reasonable skill and care: the directors are expected to show a high standard of care in their actions and consider consequences.
  • Duty to avoid conflicts of interest: they need to be loyal to the company and avoid situations which may compromise the company’s wellbeing or reputation. The directors should not act for the purpose of obtaining personal profits.
  • Duty to exercise independent judgment: the director must obtain the company’s shareholders consent to make certain decisions on behalf of the company or seek their approval of his decisions.
  • Duty not to accept benefits from other parties: the director is under a duty not to accept financial or personal benefits from third parties given to gain influence.
  • Duty to disclose interest in proposed or existing transactions: if he or she does not comply with the statutory provisions and does not disclose his or her interest, they commit a criminal offence and could be liable to a fine.

Restrictions on directors’ powers

There are certain transactions where a director needs the approval of the members of the company to make a decision. These are:

  • Loans given to directors (this also applies to giving guarantees or securities to a director)
  • Directors’ service contracts which are longer than 2 years (a ‘guaranteed term’)
  • ‘Substantial property transactions’: which are arrangements between the directors and the company relating to non-cash assets (any property which is not cash) either exceeding 10% of the value of company’s assets and worth more than £5,000 or exceeding £100,000.

A director cannot be indemnified by the company for liability he acquires through negligence, wrongdoing or a breach of duty. It is to protect the companies from any losses caused by their directors.

Remedies for a breach of duties

As directors owe their duties to the company as a whole as opposed to the individual members of the company, if he or she acts in breach of their duties, the company has got a claim and can take a legal action against the director. The remedies include:

  • Injunction or declaration to stop the director from continuing to breach his duties
  • Compensation or damages paid to reimburse the company for the loss suffered. An example can be a director’s decision to introduce new technology, which turns out to be damaging to the environment: the director will be liable for the damage if he unreasonably disregarded the warnings of the consequences.
  • Account of profits obtained in breach of fiduciary duty (breach of trust): it is an action taken against the director to take away the profits made as a result of a breach of director’s duties such as a transaction damaging for the company. It prevents the unjust enrichment of the director.
  • Restoration of the company’s property which is in the director’s hands
  • Rescission of a contract, which was signed by the director contrary to the company’s intentions
  • Summary dismissal of the director or derivative action removing a director from the office