This is a common question that we are often asked by company directors, and it is a good one, because quite often we are asked to advise in relation to directors who have exceeded what they are permitted to do by law.
Directors are subject to number of legal duties. These are set out in legislation. The most common examples can be found in the Companies Act 2006 (the “Act”). Common law obligations have also developed over time. Failure to comply with these duties can have serious consequences for both the company and the director personally.
The Act outlines several key duties for directors, including the duty to act within powers (Section 171), promote the success of the company (Section 172), exercise independent judgment (Section 173), exercise reasonable care, skill, and diligence (Section 174), avoid conflicts of interest (Section 175), not accept benefits from third parties (Section 176), and declare interest in proposed transactions or arrangements (Section 177).
Directors have duties not only to the company, but they must also have regard to the interests of shareholders.
Directors must also consider the rights and interests of creditors in some circumstances. In the case of BTI 2014 LLC v Sequana SA [2022] UKSC 2, the Supreme Court decided that in certain circumstances a “creditor duty” is triggered when directors know, or ought to know, that the company is insolvent, or insolvency is probable.
Breaches of these duties can lead to legal and reputational consequences both for the company and for directors personally. Sanctions can include liability for legal costs, injunctions, restitution orders, and disqualification. To stay compliant, directors should understand their role and duties, participate in training, stay informed about company affairs, attend board meetings, document decisions. It is also advisable for directors to consider the availability of directors and officers liability insurance.
If any of the issues in this article have affected you, we would recommend that you take independent legal advice. Please do contact our property litigation team on 0118 958 5611.