Director's Duties Under the Companies Act (2006)

Companies Act (2006): the general duties

If you are working as a director for a limited company, you must adhere to the following duties as dictated by the Companies Act (2006):

1. Act within your powers

It is imperative that a director "acts in accordance with the company's constitution." The constitution is an internal governing document within an organization, where it lists certain responsibilities, roles, and rights for its shareholders and, importantly, in this case, directors. If a director goes against anything set out in the constitution, it also goes against the Companies Act.
In addition, your powers as a director can only be used for the purposes they were given. This means you cannot abuse your authority by mistreating employees, for instance.

2. Use independent judgement

As a director, you need to exercise independent judgement. In essence, you have to avoid relying on others and make your own decisions.
Keep in mind this duty isn't infringed in two specific situations. One, when you are acting on an agreement your organization has entered into. Two, when you're following the policies laid out in the company constitution.

3. Promote company success

As director, you will naturally be promoting the success of your company. When doing this, you have to, in good faith, promote this success in a manner you feel will most benefit members overall. This also has to be done by considering the following aspects:

  • The likely long-term consequences of any decision made.
  • The interests of the organisation's employees.
  • The requirement to act fairly between company members.
  • The desire for the company to maintain a strong reputation around business conduct standards.
  • The impact made on the community and environment.
  • The need to nurture business relationships with customers, supplies, and others.

Of course, this list is not conclusive. While it does place the spotlight on important areas as far as responsible business behaviour is concerned, other elements need to be factored into the equation.

4. Don't accept third-party benefits

The Companies Act notes that a company director cannot accept benefits from third parties. As for what is defined as a "third party", this means an individual not linked to the company, an associated body corporate, or someone representing the company/associated body corporate.
There are exceptions depending on how the "benefit" is viewed. For example, if a director receives benefits from an individual as his services - whether as a director or not - are supplied to a company, these are not seen as bestowed by a third party. In addition, if the acceptance of a benefit cannot be regarded as a realistic source for a conflict of interest, the duty is again not infringed.

5. Employ reasonable care, diligence, and skill

A company director is expected to employ the same care, diligence, and skill expected from a reasonably diligent person. This includes occupying:

  • The skill, experience, and general knowledge that is reasonably expected of an individual conducting the same tasks as you relative to the company.
  • The skill, experience, and general knowledge you actually own.

Understandably, the expected standard of care, diligence, and skill is measured against both objective and subjective yardsticks. A director's abilities and knowledge might fall short if more could be reasonably expected of an individual in their position.

6. Avoid conflicts of interest

If you end up in a situation where you have an interest that conflicts with the interest of your company, this can infringe on the guidance set out by the Companies Act. The same is also applicable if you could have an interest that may conflict with the company's interests. Even if the company can ultimately benefit, this rule especially applies to the exploitation of information, opportunity, or any property.

There are two relevant exceptions where infringement doesn't occur:

  • The situation was pre-authorised. Authorisation can be provided by a specific shareholder resolution or by association. Furthermore, other directors can give authorisation in some circumstances if they don't share the same conflict.
  • The situation is not regarded as one that's likely to result in a conflict of interest.

Regarding the second point, there are no rules which dictate whether a situation can result - or potentially result - in a conflict of interest. However, some arrangements are known to have the potential to cause a conflict. These include:

  • Personal interests
  • Multiple directorships
  • Other profits
  • Advisory positions
  • Connected persons

If you feel you're in one of the above situations that may result in a conflict of interest, seek approval from other board members. You could also check if the company's articles feature provisions that relate to conflicts of interest, such as pre-authorised common conflict situations. Perhaps the easiest step you can take is to regulate your behaviour.

7. Declare any interests in existing/proposed arrangements or transactions with the company

Do you have a direct or indirect interest in an arrangement or transaction with your company? If so, it is imperative you declare both the extent and nature of this interest to the company's other directors. If the transaction/arrangement is only proposed, this must be declared before it's entered into. However, if the transaction/arrangement already exists, you must declare your interest as soon as possible.

There are notable examples of when this duty isn't infringed:

  • Your interest in the arrangement/transaction cannot be reasonably viewed as one that will result in a conflict.
  • The interest hasn't been declared as you're unaware the interest actually exists.
  • The interest hasn't been declared as the other directors are aware of it already.

Adhering to the Companies Act is essential for directors. If these general duties are breached, it can lead to serious penalties. These penalties can include compensation, damages, an injunction, and, in the case of failing to disclose an interest in a transaction or arrangement that exists, a potential criminal fine.