If you are a company director, it is important for you to be aware of the duties you owe to the company of which you are a director, and the potential consequences of breaching those duties.
The directors are responsible for the day to day management of the company. Generally, they have a wide discretion to make decisions as they see fit, acting by majority. There are few limitations applicable to the directors and the decisions they make, but they must always act in accordance with their statutory duties.
The directors' duties are set out in the Companies Act 2006, and are as follows:-
- to act within their powers;
- to promote the success of the company for the benefit of its members as a whole;
- to exercise independent judgment;
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest;
- not to accept benefits from third parties; and
- to declare an interest in a proposed transaction or arrangement.
The duties to promote the success of the company and to avoid conflicts of interest commonly cause issues for directors of private limited companies. This is because those directors are often shareholders in the company and/or are directors or shareholders in more than one company. Both of these scenarios may give rise to a breach of duty in the event that the director's personal interests, or their interests in the other company, conflict with their duties as a director.
The duties are owed to the company, and therefore if there is a breach of duty by one or more directors, it is the company which must make a claim. Such a claim would be against the director concerned. However, this would require a majority of the directors to resolve to bring such a claim. For this reason, where a company has only two directors, it is difficult for the non-breaching director to do this, as they cannot make a majority decision by themselves. Alternatively, the shareholders can make the claim on the company's behalf. This is called a derivative action. However, there are a number of legal hurdles which make derivative actions difficult to bring.
Be aware that if the company becomes insolvent and a director breaches their duties, a claim against the director in breach may be brought by an appointed liquidator or administrator.
If you are a director and have concerns regarding the duties you owe to the company of which you are a director, or a shareholder and are concerned about the directors of the company you hold shares in, please contact a member of the corporate team at Ramsdens, who will be able to advise you.
For more information on anything covered in this article, please contact a member of our Company and Commercial Law team by email at info@ramsdens.co.uk or call 01484 821 500.