How can a company ensure that a director performs?

Posted: Wednesday, 15 July 2015 @ 16:12

A director owes duties to the company which either arise as a result of the Companies Act, common law or contract.

Duties under the Companies Act

Under the Companies Act 2006, the duties are owed not just by directors who are registered as such but also by those who are held out as directors even though not formally appointed, or who direct the business of the company even though they are not registered or even called directors.

The duties are generally owed to the company itself and not to anyone else although there are exceptions in certain circumstances (duties are owed primarily to creditors when a company is insolvent, and directors must also take into account the interests of employees and other stakeholders).

The duties that a director owes to the company as set out in the Companies Act are as follows:

  • To act within his powers – this will depend on what the company’s Constitution or Articles say.
  • To promote the success of the company – directors must also take into account other stakeholders when making decisions including employees, suppliers, customers, the shareholders, the community and the environment.
  • To exercise independent judgment – this is subject to what is said in the company’s Constitution or Articles, or any shareholders’ resolutions.
  • To avoid conflicts of interest.
  • Not to accept benefits from 3rd parties – this not only includes bribes but also gifts depending on the timing and the company’s policy for accepting small gifts.
  • To declare to the other directors interests in any transaction whether direct or indirect.

Duties at Common Law

Duties are also owed under the common law and overlap to a large extent with the duties imposed by the Companies Act.

These common law duties, often called fiduciary duties, include the following duties:

  • To act in good faith in what they consider to be the best interests of the company.
  • To exercise their powers for a proper purpose, that is for the benefit of the company.
  • To avoid a conflict of interest.
  • Not to make a secret profit – any personal profit a director makes from opportunities that arise from opportunities resulting from the directorship must be paid to the company.
  • To use skill and care – a director is required to use any particular skill he or she has and to take reasonable care in performing their duties.

Duties under an Agreement

A company may impose certain duties on a director by agreement. This can be done in the company’s Articles, by shareholders’ resolution, or in a Director’s Service Agreement.

Enforcement

The duties under the Companies Act or at common law can be enforced if necessary by the court. The court can order a director to take action or refrain from taking action in order to comply, or to pay damages personally if he is already in breach.

The majority of shareholders can remove a director from office by following certain procedures laid out in the Companies Act or by following the company’s Constitution or Articles if they have a provision for removing a director.

Action to Take

It is always best to be clear before problems arise as to what a director is expected to do and limits to their powers. This is likely to be best done by agreeing a Service Agreement with the director and setting out any limitations in the company’s Articles or by passing a shareholders’ resolution.

If problems arise and you need to enforce any of these duties, you may need to make a claim. It is advisable to take legal advice at this stage as how the claim is phrased will often determine how successful you will be.

If a director is about to do something in breach of his powers, you may need to obtain a court order preventing him from doing so, called an injunction. Again it is advisable to take legal advice as soon as possible.

Gary Cousins
Business Solicitor

Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
Call Gary on +44 (0)121 778 3212 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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