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Remember Your Duties

Mar 19, 2012

Everyone knows a lawyer who sounds like a very boring stuck record, but this is one area that I have no problem in being that lawyer; so I will start this as I mean to go on. “Directors' Duties apply to you, never forget them."   Due to the Companies Act 2006, as a Director you are now under a statutory obligation:   - to act within your powers (act in accordance with the company’s constitution and only exercise your powers for their proper purpose); - to promote the success of the company (act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of the shareholders as a whole); - to exercise independent judgement; - to exercise reasonable care, skill and diligence; - to avoid conflicts of interest; - not to accept benefits from third parties; and - to declare interests in proposed transactions or arrangements with the company.   Are they new?   No, in all honesty these duties are not new. Before the inclusion in the Companies Act 2006 you owed a “fiduciary” duty to the company for many similar areas. However, what is new is that these duties are enshrined in statute so all can see them and all can know about them. Under the new regime, you can resign as a Director and you can still face a claim by the new board of the company if they decide you caused a loss which the company is now suffering for. So, Directors' Duties apply to you, never forget them.   The most common two questions I hear at the moment are: Why should I worry, surely it’s just for the big companies? If they are that important why have the banks Directors not been sued?   I can answer the first by way of the example below, however on the second point I still have no idea and I would welcome to any views on this! All I will say is “Directors' Duties apply to you, never forget them”. You may think the example below is a little extreme, but already at least one Director has been successfully sued for breaching his duties as a Director for not warning the company (before he resigned) about his own intention to compete (quite legitimately) against the company after he left!   Investment example:   You have finally managed to persuade that wealthy investor to come on board and take the company from the small profitable “dinghy” to a large and extremely profitable “yacht”. You are already eyeing up the prize of selling completely in 5 years and retiring to a beach. You will undoubtedly be tied into a lengthy investment agreement and new articles with the investor who will become a major shareholder and one with substantial clout (i.e. experience, big lawyers and money!).  As time goes on the company grows and you’ve been able to distribute healthy dividends. Then disaster strikes, one of your Directors has been misbehaving and the irate investor decides that your (and the board’s) lack of action against the Director has caused the loss to the company. The investor (as a shareholder) then goes to court to get permission to sue you personally under the company’s name. The funds received (from successfully suing you) go to the company, with the board then choosing if to pass them onto the shareholders (by dividends).   So one more time; Directors' Duties apply to you, never forget them.