Directors' duties

The general duties of a director (ie director’s duties) are set out in the Companies Act 2006 which places a fiduciary duty and a duty of care and skill on all statutory directors of a company.

A fiduciary relationship is a relationship of trust. This relationship places a duty on directors to act within the best interests of the company, in good faith and honesty.

A duty of care and skill requires directors to act with a certain level of care and skill while fulfiling their role as company directors. This means that the director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director in relation to the company (ie the minimum standard for directors across the board), and

• the general knowledge, skill and experience that the director has (ie a subjective assessment based on the director’s specialist knowledge, skill and experience)

Most of the directors’ duties are fiduciary duties.

What are the duties of a company director?

The director’s duties of a statutory director are:

• to act only within the powers conferred upon the director by the company’s constitution (ie the memorandum of association and the Articles of association)

• to promote the success of the company, which involves the director acting in good faith and following best practice with regard to business transactions and the impact on the environment and community

• to exercise independent judgement

• to manage the company with reasonable care, skill and diligence

• to avoid direct or indirect conflicts of interest

• to refrain from accepting gifts from others

• to declare any personal interest (be it direct or indirect) in proposed transactions and/or company business

The duties are primarily owed to the company. However, depending on the circumstances, a directors’ duties can also require their acting in the best interests of other interested parties (eg employees and creditors). 

For instance, if directors become aware that their company is insolvent or is at risk of becoming insolvent (even if insolvency is not an inevitability), they have a duty to consider the interests of creditors and to act in the creditors’ best interests. These interests will need to be balanced with those of the company (eg the shareholders), especially early on when insolvency is not yet inevitable.

Who can bring a claim for breach of the duties?

If there is a breach of a director’s legal duties, it is typically the company which can make a claim action against the director. This is because directors primarily owe their duties to the company. Generally, an action for breach of the directors’ duties is brought by the board of directors or, where the company is insolvent, a liquidator.

However, in certain circumstances, a shareholder or a group of shareholders may be able to bring a claim. This is known as a ‘derivative action’ or ‘derivative claim’. A derivative claim may be brought if the board of directors is unwilling, or unable, to take action against one or more fellow directors in breach of their duties. Ask a lawyer for more information.

What are the consequences of not complying with the directors’ duties?

There are a variety of consequences for directors who do not comply with their duties, including:

• the director having to reimburse the company for any loss or damage it has suffered

• the director being held personally or criminally liable should they be involved in any wrongful activity (eg bribery or fraudulent trading) 

• the director’s services contract being terminated

• the director being disqualified from acting as a director

How can directors be protected?

The Companies Act 2006 prohibits directors from being exempt or indemnified against liabilities in connection with any negligence, default, breach of duty or breach of trust. However, in the event of a breach of the directors’ duties, directors can be protected by:

• insurance cover

• an indemnity

• ratification by the company (ie the company shareholders passes a resolution approving the director’s actions in breach of the duties) - note that some acts cannot be ratified (eg where the director's actions were dishonest or inherently unlawful, such as the payment of an unlawful dividend)

• obtaining relief from the court for the breach of duty

While acting as a company director, directors should take care to ensure that they comply with their duties. In order to demonstrate such compliance, directors should:

• keep up-to-date accounting records and reports

• prepare a Director's Report providing information on the affairs of the company

• keep Minutes of board meetings to record decision-making. This helps ensure the director thinks about their duties when making decisions on behalf of the company

• follow the proper procedure

For more information, read The role of a company director and Misfeasance and insolvency. If you have any questions about directors’ duties, Ask a lawyer.