Overview — directors' dutiesDirectors' general duties

Directors manage the day-to-day business of a company and owe a number of duties to it. Many of those duties have been developed by the courts over hundreds of years from more general common law rules and equitable principles. The main directors’ duties developed by the courts have, for the first time, been set out in statute in ss 171-177 of the Companies Act 2006 (CA 2006).

The duties set out in ss 171-177 CA 2006 (general duties) are:

• a duty to act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred

• a duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard various matters

• a duty to exercise independent judgment

• a duty to exercise reasonable care, skill and diligence

• a duty to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company

• a duty not accept a benefit from a third party conferred by reason of the director being a director, or his doing (or not doing) anything as director, and

• a duty for the director to declare if he is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the other directors

The first four general duties listed came into force on 1 October 2007 and the other three general duties listed came into force on 1 October 2008, subject, in some cases, to transitional provisions.

There are detailed provisions in the CA 2006 that supplement those setting out the general duties. These cover issues including:

• the scope and nature of the general duties

• the interpretation of the general duties

• the application of the general duties, and

• the consequences of a breach of the general duties,

and, in some cases, are subject to transitional provisions.

The general duties are important for two key reasons:

• a failure by a director to comply with any of the general duties has potentially serious consequences for that director (although it may be possible for a director to have a breach of duty ratified, to protect himself from the consequences of a breach of duty or to obtain relief from a breach of duty, depending on the circumstances), and

• the directors’ report prepared for each financial year of a company must contain a business review (except if the company is entitled to the small companies exemption), to inform members of the company and help them assess how the directors have performed their general duty to promote the success of the company

Although the general duties are important, they are not the only duties of directors. Directors have a range of other duties, both set out in statute and laid down by the courts.

Declaration of an interest in a transaction or arrangement with the company

One of the general duties of a director is that if he is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company he must declare the nature and extent of that interest to the other directors.

Although it is not one of the general duties, there is also an obligation on a director who is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into with the company to declare the nature and extent of that interest to the other directors. This obligation is framed in a similar way to the duty to declare an interest in a proposed transaction or arrangement with the company, but it is not identical to it. A number of the provisions in the CA 2006 relating to this obligation are subject to transitional provisions.

If a director is in any way, directly or indirectly, interested in:

• a proposed transaction or arrangement with the company of which he is a director, or

• a transaction or arrangement that has been entered into by the company of which he is a director

the articles of association of the relevant company should always be reviewed, as:

• they may contain provisions that apply when a director has an interest in such a transaction or arrangement (such provisions may be wider in scope than the provisions in the CA 2006 relating to the declaration of a director's interests and may, for example, put additional obligations of disclosure on the director), and

• they will determine whether a director who has an interest in such a transaction or arrangement may participate in decisions of the directors when it is the matter in hand.