Directors’ duties and liabilities: General statutory duties

The general duties that directors are bound by can largely be found in sections 171-177 of the Companies Act 2006 (the CA 2006). We will be exploring the following duties in more detail in this article:

• S.171: Duty to act within powers
• S.172: Duty to promote the success of the company
• S.173: Duty to exercise independent judgment
• S.174: Duty to exercise reasonable care, skill and diligence.

The duty to act within powers (section 171 of the CA 2006)

This duty requires each director to:

• Act in accordance with the company’s constitution (being the company’s Articles of Association or any resolution affecting the constitution)
• Only exercise their powers for the purposes for which they are conferred.

Every director should ensure that they are fully aware of anything affecting the company’s constitution and before exercising any of their powers, they should consider whether that power is being exercised for the purposes for which it was conferred. If in doubt, directors should consider taking legal advice on the scope of these powers because a breach of these duties can have serious repercussions.

The duty to promote the success of the company (section 172 of the CA 2006)

This duty requires that a director acts in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole.

The meaning of ‘success’ is not easily defined, but will often mean the long-term increase in value of the company. However, this is not always the case, as success can go beyond monetary value and directors should consider the company’s constitution and recent decisions of the directors and shareholders to inform what this might mean to them, in context.

A director acting in good faith and in a way most likely to promote the success of the company, must have regard to the following factors:

• The likely consequences of any decision in the long term
• The interests of the company’s employees
• The impact of the company’s operations on the community and the environment (i.e. corporate social responsibility factors)
• The need to foster the company’s business relationships with suppliers, customers and others
• The desirability of the company maintaining a reputation for high standards of business conduct
• The need to act fairly as between shareholders of the company.

However, the Companies Act 2006 makes it clear that this list of factors is not exhaustive; and a director should consider any other factors that are relevant to the decision in-hand.

The principle of enlightened shareholder value also requires directors to promote the success of all the stakeholders of a company, and not just the shareholders. This might include employees, the environment and consumers.

Duty to exercise independent judgment (section 173 of the CA 2006)

A director has a duty to exercise independent judgement, which means that they must not blindly follow the advice or instructions of a third party, or fetter their discretion.

For example, a director of a joint venture company who is appointed by a particular shareholder of that joint venture must ensure that they exercise their independent judgment as a director and do not carry out their appointer’s instructions without question.

This does not mean that a director must act alone. They are entitled to discuss matters with their fellow directors, rely on the advice and work of others, and delegate matters to board committees or individuals where it is appropriate and reasonable to do so.

Duty to exercise reasonable care, skill and diligence (section 174 of the CA 2006)

A director has a duty to exercise the same reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:

1. The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company
2. The general knowledge, skill and experience that the director has.

The first part of this test is objective and sets a minimum standard for a director based on their particular role and responsibilities. The second part of the test is subjective and takes into account the particular director’s actual experience, knowledge, skills and specialisms; e.g. if a director of a company is a qualified accountant, has other professional qualifications or particular skills or expertise they will therefore be held to a higher standard.

In part 3 of this series, we will look in more detail at the duty to avoid conflicts of interest.

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