Introduction to directors' legal duties

Out-Law Guide | 04 Jul 2007 | 9:57 am | 2 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. There's no doubt that directors’ legal duties are onerous and the penalties for breaching them can be stiff. (See:...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

Introduction

There's no doubt that directors’ legal duties are onerous and the penalties for breaching them can be stiff. (See: Remedies where there is a breach of directors' duties, an OUT-LAW guide.) But it is important to remember that there is no expectation of perfection or infallibility. The overriding legal requirement is to act honestly, competently and conscientiously.

Provided directors have a proper understanding of their role and take basic protective measures, the risks of committing a breach of duty can be kept to an acceptable level.

In this guide, we explain some of the legal duties owed by a director and examine the code of directors' duties in the Companies Act 2006.

The nature of the fiduciary relationship

Many of the duties imposed under the law arise because the director acts as a fiduciary for the shareholders of the company. A fiduciary is someone who exercises powers or holds money or assets on behalf of others. Thus, the trustee of a family trust is a fiduciary for the beneficiaries; a solicitor holding money for a client is a fiduciary for that client.

The law and the judges provide protection for those on whose behalf fiduciaries act, by placing duties on the fiduciary and imposing sanctions when the duties are breached.

Directors should always see themselves as custodians of the company: its assets are not theirs to deal with solely as they wish. Like the trustee, they are holding and managing assets on behalf of beneficiaries, in their case, the shareholders.

The extent of a director’s power and authority

Directors do not have unlimited powers to run a company on behalf of the shareholders. They may only exercise the powers granted to them either by the general law or by the company’s constitution (the articles of association – see: The company constitution, an OUT-LAW guide.) For that reason, most companies will have an article on the lines of: “the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company”.

Unless specific powers and authority have been delegated to a named director, it will usually be the case that powers can only be exercised by the board of directors acting together as a body.

Directors should be aware that when they delegate any of their duties to others, including the company secretary, the responsibility and liability for fulfilling those duties remains with them. Delegation and abdication are not the same thing. Directors need periodically to satisfy themselves that the secretary or other delegate is carrying out his or her tasks properly and that all legal requirements are being met. And warning signs to the contrary should be acted on.

See also: Directors' duties (menu of guides)