An overview of directors’ duties and liabilities

What is a director?

Directors are the persons legally responsible for running a company and the human agents through which a company operates. They have the power to bind the company to transactions and make decisions about the commercial endeavours that the company pursues. The law recognises different categories of directors, which can include individuals who are not officially recorded as directors with Companies House. In recognition of the powers they possess, all directors are subject to a range of legal duties that inform and regulate how those powers should be exercised.

What are the different categories of directors recognised by law?

1. De Jure Director – Someone who has been appointed as a director in accordance with the relevant formalities under the Companies Act 2006 (the CA 2006)
2. De Facto Director – Someone who holds themselves out to be a director so that the outside world would assume them to be one, although they have not actually or validly been appointed as such
3. Shadow Director – Someone who is not a validly appointed director, and does not claim to be a director, but is running the company in the background. Professional advisors (such as lawyers and accountants) are given special protections to avoid the possibility of their advice meaning they could be construed as a shadow director. This protection is provided under the proviso that the advisor does not go beyond merely professionally aiding and advising.

Ability of directors to bind the company – agency

Agency is a common law principle which provides directors with the ability to bind a company as a result of the actual authority granted to them by the appointment. If a contract is entered into by a company’s directors without authority, then it may be set aside by the company in certain circumstances, but this cannot be guaranteed as under the common law of agency, directors can bind a company with apparent authority if a representation is given by them to a third party that they have authority to bind the company.

The CA 2006 also stipulates at s.40(1) that regardless of what a company’s constitution states, a director can bind the company if the third party it is dealing with has acted in good faith. In other words, a third party is entitled to presume that the person they are dealing with is an individual capable of binding the company and, therefore, able to enter into legally enforceable agreements.

Directors’ duties

Because directors have wide-ranging powers to bind the company there are stringent duties in place to ensure they are not abused. These duties are owed to the company and are known as ‘fiduciary duties’ because directors are taking on a role that gives rise to obligations of trust and confidence.

The range of fiduciary duties have been developed by the common law, but have now largely been codified into statute and can be found in part 10 of the CA 2006. The main general directors’ duties are set out at sub sections 171-177 and have been in effect since 1 October 2007, except sub sections 175 and 176 which came into effect on 1 October 2008.

The list is non-exhaustive, but some of the duties include:

• S.171: Duty to act within powers – this means that a director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred
• S.172: Duty to promote the success of the company – this means that a director must act in a way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard to various matters
• S.173: Duty to exercise independent judgment
• S.174: Duty to exercise reasonable care, skill and diligence
• S.175: Duty to avoid conflicts of interest – this means that a director is to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
•  S.176: Duty not to accept benefits from third parties – this means that a director is not to accept a benefit from a third party conferred by reason of the director being a director, or them doing (or not doing) anything as a director
• S.177: Duty to declare interest in proposed transaction or arrangement with the company – this means that a director is to declare if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the other directors.

In part 2 of this series, we will look in more detail at the general statutory duties owed by directors.

If you have any questions about the topics raised in this article, please get in touch.