Directors’ duties: Staying shipshape
If we think about companies as ships, then company directors are a ship’s captains. They are tasked by shareholders of the company with plotting their precious vessel’s course to success while navigating choppy commercial waters, and perhaps dealing with an unruly crew.
To do this, like any captain, a director needs to be imbued with considerable powers to allow them to make day to day decisions on board. Yet, what is often overlooked or misunderstood are the duties a director owes a company, which come as part and parcel of those powers.
For centuries, directors have owed a duty of care to companies, but the main directors’ duties were finally codified by the Companies Act 2006 (“CA 2006”). The duties are:
- to act in accordance with the company’s articles and only to exercise powers for the purposes for which they are conferred;
- to act in good faith to promote the success of the company for the benefit of its shareholders;
- to exercise independent judgment;
- to exercise reasonable care, skill and diligence;
- to avoid situations where the director has or could have a direct or indirect conflict of interest;
- not to accept a benefit from a third party that is given to the director because they are a director of the company, or where the benefit is (or could be) intended induce the director to act in a certain way; and
- to declare to other directors if they have an interest in a proposed transaction or arrangement the company is to enter in to.
What’s more, directors should also be aware that in addition to the CA 2006 duties, a company’s articles may dictate what a director can and can’t do.
Consequences of breach
If a director breaches one or more of the general duties, the company may have grounds sue the director (acting by either the other directors or the shareholders), and potentially that director could then be disqualified from acting as a director in the future.
Directors can also incur criminal liability for, among other offences, insider dealing, bribery, health and safety offences, and very scarily – gross negligence manslaughter.
Clearly either of these outcomes could be disastrous for that director’s finances and career.
What if the ship sinks…?
In larger companies there’s often a distinction between directors and shareholders but what if you’re the captain of a ship you own? It is usual in SMEs and family-run companies for the directors and the shareholders to be one and the same. Surely you can sail your ship anywhere and any way you want, accountable to no man as you hunt your treasure…?
This is all well and good…until the ship sinks. Unfortunately the Insolvency Act 1986 was not drafted with romantic maritime analogies in mind. If a company goes in to liquidation a Liquidator will scour the dealings of the company looking for any breach of directors’ duties; and if they find one, they may seek to sue that director on behalf of the company’s creditors, meaning the captain may well go down with the ship.
Directors who are unsure of the extent of their duties – and who want to keep their feet dry – should seek appropriate advice, especially if they feel a storm is coming.