What are directors' duties?
Aug 24, 2021
Author: Charlotte Lang
Generally speaking, directors are people who manage a company. There are various different types of directors, which are outlined below. The CA definition of a director includes any person occupying the position of director, by whatever name called. Even though there are different types of directors, they are all generally covered by the same legal principles.
Executive directors are involved in the day-to-day business of a company. They are usually an employee and most of their time will be spent working for and managing the company. Executive directors normally enter into service contracts, which aims to protect both the company and directors in their business relationship.
Both executive directors and non-executive directors may be appointed as members of the board. The difference between the two is that a non-executive director is not involved in the daily management of the company and are not an employee. Private companies do not usually have non-executive directors on their board.
A chairperson is a member of the board who is appointed as the individual to lead meetings. A chairperson would usually set the agenda for meetings and sign off the minutes.
A shadow director is someone who has not been formally appointed as a director. However, they can influence decisions by giving directions or instructions to the directors of a company. It is a question of fact as to whether someone is a shadow director. Lenders and creditors are examples of individuals who could become a shadow director. Most of the CA applies to shadow directors in the same way it applies to executive or non-executive directors. In particular, the directors’ duties in s171-177 of the CA do apply.
A de-facto director is somebody who is also not formally appointed as a director, but performs the functions of a director. The acts of an individual will be assessed on an objective basis to consider if an individual is deemed to be a de- facto director. The same duties under the CA apply to a de-facto director as they do to a formally appointed director.
If a company’s articles permit it, a director can have an alternate director stand in their place and attend meetings. An alternate director will be treated in the same way as an executive or non-executive director.
Currently, both individuals and companies can be directors. However, it appears as though this will change. Once implemented, Section 87 of the Small Business, Enterprise and Employment Act 2015 will implement CA s156A prohibition and require all directors to be natural persons and with certain limited exceptions. Corporate directors will be prohibited unless their own boards comprise all natural persons, and those natural persons have their identities verified. On 9 December 2020, the Department for Business, Energy & Industrial Strategy (BEIS) published a consultation paper on implementing the section 156A prohibition however the additional pressures companies face during the ongoing COVID-19 pandemic were noted and that accordingly the time-table for implementation would therefore be sensitive to those pressures.
Directors’ duties were around long before the CA (and its 1985 predecessor) came into force, as common law duties. However, in 2006 the CA codified these duties in s171-s177. Directors owe the duties to the company, not the shareholders, creditors or other directors. As already mentioned there are different types of directors but all types have to act in accordance with the duties where applicable.
S171 – Duty to act within powers
S172 – Duty to promote success of the company
S173 – Duty to exercise independent judgment
S174 – Duty to exercise reasonable care, skill and diligence
S175 – Duty to avoid conflicts of interest
S176 – Duty not to accept benefits from third parties
A director should not accept benefits from third parties for the reason of being a director. To ensure directors do not fall foul of this duty it is useful if companies have hospitality and gift policies. Acceptance of benefit that is not reasonably regarded as to give rise to a conflict of interest is not caught by this section.
S177 – Duty to declare interest in proposed transaction or arrangement with company
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Charlotte graduated from Sussex University and completed the Legal Practice Course at the University of Law. Prior to joining Waterfront, she spent over two years in-house at a start-up tech company. She works with all four of our key practice areas: Commercial and Tech Law, Intellectual Property, Corporate and Employment Law. Read more.