Directors` Duties

The Companies Act 2006 (“the 2006 Act”) codified many of the existing ‘common law’ and fiduciary duties of company directors. These duties apply to executive, non-executive and shadow directors. Below is an example of how these duties under the 2006 Act apply.

Mr B is a director (and shareholder) of XYZ Ltd. XYZ Ltd has two other shareholders and directors, Mr D and Mr E. Mr D and Mr E are old friends with Mr B and appointed him as a director. To begin with all goes well, but, after 18 months, Mr B stops putting in any effort and begins to fail to attend the office or meetings (including board meetings). Things deteriorate further and Mr D and Mr E discover, among other things, that Mr B has set up his own company and is diverting business opportunities that could be very appropriate for XYZ Ltd.  to his new company.

Action

Under the 2006 Act, as a director of XYZ Ltd, Mr B has a number of general duties:

1. Act within his powers (so act in accordance with XYZ Ltd’s constitution and only exercise his powers for their proper purpose)
2. Promote the success of XYZ Ltd
3. Exercise independent judgment
4. Exercise reasonable care, skill and diligence
5. Avoid conflicts of interest
6. Not to accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director
7. Declare interests in proposed transactions or arrangements with XYZ Ltd

From the limited information given above, Mr B could well be in breach of several of these general duties by setting up a competing company and directing clients away from XYZ Ltd.

By doing these things, Mr B is almost certainly failing to promote the success of XYZ Ltd.  Six factors underpin this duty and a director is required to have regard to all of these:

• The likely long-term consequences of any decision
• The interests of employees
• The need to foster business relationships with suppliers, customers and others
• The impact of the company’s operations on the community and the environment
• The desirability of maintaining a reputation for high standards of business conduct
• The need to act fairly between members

Mr B is also in breach of his duty to avoid a conflict of interest. A director must avoid a situation in which he or she: "has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests." This is very broad and covers both actual and potential conflicts and direct and indirect interests. It applies both to a conflict of interest and a conflict of duty, so it may catch Mr B as he:

• Has an interest in a commercial opportunity that could also be exploited by XYZ Ltd
• Is, apparently, using, for his own purpose, information belonging to XYZ Ltd

The consequences of a breach of the 2006 Act duties are the same as for breach of the corresponding common law or fiduciary duties.

Action by XYZ Ltd

The duties are owed to XYZ Ltd and only XYZ Ltd will be able to enforce them, although in certain circumstances shareholders can bring a “derivative action” on behalf of a company. Such an action may be brought in respect of negligence, default, breach of duty or breach of trust by a director of a company. This means that a derivative action may be brought in respect of alleged breach of any of the 2006 Act general duties of directors.

Removal

Whatever the circumstances, shareholders always have the right to remove a director by shareholder resolution. That right is enshrined in statute and cannot be taken away by a company’s articles. However, the director’s employment rights will, be unaffected by the shareholder vote – so he or she may still have a claim for wrongful and/or unfair dismissal.