The Companies Act 2006 clearly outlines the duties and responsibilities of directors, whether they are individuals or a corporate entity, in several specific sections. Here is a breakdown of where these duties are addressed within the Act:
Duty to Act within Powers: Section 171 – Directors must act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred.
Duty to Promote the Success of the Company: Section 172 – Directors must act in a way they believe, in good faith, will be most likely to promote the success of the company for the benefit of its members, considering a range of factors affecting the company and its stakeholders.
Duty to Exercise Independent Judgment: Section 173 – Directors must exercise independent judgment without being unduly influenced by others.
Duty to Avoid Conflicts of Interest: Section 175 – Directors must avoid any situation in which they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
Duty not to Accept Benefits from Third Parties: Section 176 – Directors should not accept any benefits from third parties conferred because of their position as a director or their power to make decisions for the company.
Duty to Declare Interest in Proposed Transaction or Arrangement: Section 177 – Directors must declare the nature and extent of any direct or indirect interest in a proposed transaction or arrangement with the company.
These sections form the core of the statutory duties imposed on directors, aimed at promoting good governance and accountability in the management of companies in the UK.
Strategic Responsibilities
Beyond legal duties, directors are tasked with setting the company’s strategic aims, providing the necessary leadership to put these strategies into effect, and supervising management’s performance. This involves:
Assessing and managing risks
Ensuring adequate financial resources
Monitoring operational performance
Engaging with stakeholders
Corporate Directors
Requirement for a Human Director: The Companies Act 2006 does require that at least one director of a private company be a natural person (Section 155). This means while a corporate director can be appointed, there cannot be a situation where all the directors are corporate entities.
Duties and Responsibilities: The duties outlined in Sections 171 to 177, outlined above, that apply to directors are also applicable to corporate directors. This includes the duty to act within powers, duty to promote the success of the company, duty to exercise independent judgment, and so on.
Representation: Since a corporate entity cannot act by itself, it acts through a natural person authorised to do so on its behalf. This individual must act according to the obligations and duties applicable to directors.
Proposed Reform and Regulations
The UK government has been considering changes to the rules around corporate directors as part of broader corporate governance reforms.
The Small Business, Enterprise and Employment Act 2015 initially proposed that all directors must be natural persons, and corporate directors were to be phased out except in certain circumstances where their use could be justified.
The implementation of these rules concerning corporate directors has been delayed, and specific guidelines and exceptions are still under discussion.
These reforms are intended to enhance transparency and accountability within corporate governance frameworks, addressing concerns that corporate directors can obscure the true controllers of a company.
Breach of Duties – Civil Liability
In the UK, the legal implications of a director’s role are significant and multifaceted. Directors are required to adhere strictly to their duties as outlined in the Companies Act 2006, and failure to do so can lead to various legal consequences. Below are some of the key legal implications for directors in the UK:
Directors who fail to comply with their statutory duties under the Companies Act 2006 (e.g., duties to act within their powers, promote the success of the company, or avoid conflicts of interest) can face civil actions brought by the company itself. If their actions or omissions damage the company, directors might be required to compensate the company for any loss suffered or to return any gains made from breaches.
Negligence Claims: Under the duty to exercise reasonable care, skill, and diligence (Section 174), directors could be subject to negligence claims if they fail to act with the competence expected of someone in their position, leading to financial loss for the company.
Breach Of Duties – Criminal Liability
False Statements: Directors can face criminal charges for knowingly or recklessly making a false statement (e.g., about the company’s finances) to shareholders, auditors, or the market.
Fraud and Misconduct: Fraudulent trading (carrying on business with intent to defraud creditors) or wrongful trading (continuing to trade when there is no reasonable prospect of avoiding insolvent liquidation) can result in criminal prosecution.
Disqualification
Under the Company Directors Disqualification Act 1986, directors who are found guilty of certain breaches of company law, including persistent breaches of corporate legislation or serious misconduct, can be disqualified from acting as a director for a period of between 2 and 15 years.
Such a disqualification can extend to being involved in the promotion, formation, or management of a company without court permission.
Personal Liability
Directors can be personally liable for the company’s debts and obligations.
This can occur in cases of wrongful or fraudulent trading, or if personal guarantees have been given for loans or other credit facilities.
Reputational Damage
Legal breaches can lead to severe reputational damage, affecting a director’s professional standing and future career opportunities.
This is particularly significant in today’s environment, where corporate governance and ethical conduct are under intense public and media scrutiny.
Regulatory Sanctions
Directors could also face sanctions from regulatory bodies such as the Financial Conduct Authority (FCA) or the Insolvency Service, depending on the nature of the wrongdoing and the type of business the company is involved in.
Remedial Actions
If directors breach their duties, they may be required to take remedial actions, which can include restoring company property, releasing profits made from transactions, or rescinding contracts where conflicts of interest were not appropriately declared.
