Longer Reads

What you need to know: directors’ duties

Senior Associate Gavin Kramer discusses the key responsibilities of directors from exercising independent judgment to avoiding conflicts of interest as set out in The Companies Act 2006.

1 minute read

Published 5 July 2023

Authors

Share

Key information

Many directors, busy running their companies in difficult economic times, may regard the question of their duties as a director to be a largely abstract concern to which little attention needs to be paid. However, the breach of those duties can have serious real-life consequences, from claims against the director by the company or, more usually, a liquidator if the company fails and goes into insolvent liquidation, to the risk of being disqualified from acting as director on the application of the Secretary of State for a period ranging from two years to, in the most extreme cases, fifteen.

These duties fall into two categories – the statutory duties set out in the Companies Act 2006, also known as the general duties, and what are called fiduciary or common law duties, developed over time by the courts, which continue to apply alongside the statutory duties.

The statutory duties include acting in accordance with the company’s constitution, promoting the company’s success for the benefit of shareholders, exercising independent judgment, and avoiding conflicts of interest, among others. Fiduciary duties involve acting with loyalty and good faith, using the company’s assets for its benefit, and being informed about the company’s affairs.

These duties apply to all directors, including non-executive and de facto directors. The duty to promote the company’s success is modified to include the interests of creditors when the company is insolvent or close to insolvency. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors.

Directors who breach the creditor’s duty prior to their company going into insolvent liquidation therefore run the risk of the liquidator taking legal action against them to recover a compensatory payment equal to the loss caused by their breach.

Directors who pay themselves excessive salaries or bonuses or who confer excessive rewards on employees whom they wish to favour, for example family members, when they know, or ought to know, that their company is insolvent or bordering on insolvency are likely to be breaching their duty to the company’s creditors, as well as their duties to the company, and putting themselves at risk of a claim for equitable compensation or damages by a future liquidator.

It is therefore important for anyone who is, or who intends to be, a director of a company registered in England and Wales to be aware of the duties described above. If in doubt about the correct steps to take, directors should seek legal advice at an early stage to avoid the risk of claims against them in the future.

This article was first published on Accountancy Daily in July 2023.

For more information, listen to our Directors’ Duties podcast.

Related latest updates
PREV NEXT

Related content

Arrow Back to Insights

Longer Reads

What you need to know: directors’ duties

Senior Associate Gavin Kramer discusses the key responsibilities of directors from exercising independent judgment to avoiding conflicts of interest as set out in The Companies Act 2006.

Published 5 July 2023

Associated sectors / services

  • Corporate recovery, restructuring & insolvency

Authors

Many directors, busy running their companies in difficult economic times, may regard the question of their duties as a director to be a largely abstract concern to which little attention needs to be paid. However, the breach of those duties can have serious real-life consequences, from claims against the director by the company or, more usually, a liquidator if the company fails and goes into insolvent liquidation, to the risk of being disqualified from acting as director on the application of the Secretary of State for a period ranging from two years to, in the most extreme cases, fifteen.

These duties fall into two categories – the statutory duties set out in the Companies Act 2006, also known as the general duties, and what are called fiduciary or common law duties, developed over time by the courts, which continue to apply alongside the statutory duties.

The statutory duties include acting in accordance with the company’s constitution, promoting the company’s success for the benefit of shareholders, exercising independent judgment, and avoiding conflicts of interest, among others. Fiduciary duties involve acting with loyalty and good faith, using the company’s assets for its benefit, and being informed about the company’s affairs.

These duties apply to all directors, including non-executive and de facto directors. The duty to promote the company’s success is modified to include the interests of creditors when the company is insolvent or close to insolvency. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors.

Directors who breach the creditor’s duty prior to their company going into insolvent liquidation therefore run the risk of the liquidator taking legal action against them to recover a compensatory payment equal to the loss caused by their breach.

Directors who pay themselves excessive salaries or bonuses or who confer excessive rewards on employees whom they wish to favour, for example family members, when they know, or ought to know, that their company is insolvent or bordering on insolvency are likely to be breaching their duty to the company’s creditors, as well as their duties to the company, and putting themselves at risk of a claim for equitable compensation or damages by a future liquidator.

It is therefore important for anyone who is, or who intends to be, a director of a company registered in England and Wales to be aware of the duties described above. If in doubt about the correct steps to take, directors should seek legal advice at an early stage to avoid the risk of claims against them in the future.

This article was first published on Accountancy Daily in July 2023.

For more information, listen to our Directors’ Duties podcast.

Associated sectors / services

  • Corporate recovery, restructuring & insolvency

Authors

Need some more information? Make an enquiry below.

    Subscribe

    Please add your details and your areas of interest below

    Specialist sectors:

    Legal services:

    Other information:

    Jurisdictions of interest to you (other than UK):



    Article contributor

    Enjoy reading our articles? why not subscribe to notifications so you’ll never miss one?

    Subscribe to our articles

    Message us on WhatsApp (calling not available)

    Please note that Collyer Bristow provides this service during office hours for general information and enquiries only and that no legal or other professional advice will be provided over the WhatsApp platform. Please also note that if you choose to use this platform your personal data is likely to be processed outside the UK and EEA, including in the US. Appropriate legal or other professional opinion should be taken before taking or omitting to take any action in respect of any specific problem. Collyer Bristow LLP accepts no liability for any loss or damage which may arise from reliance on information provided. All information will be deleted immediately upon completion of a conversation.

    I accept Close

    Close
    Scroll up

    Find out about Business

    Find out about Dispute Resolution

    Find out about Individuals & Families

    Find out about Real Estate

    We are Collyer Bristow - The law firm for those that
    value individuality, creativity and collaboration.

    Legal & Pricing info Regulatory InformationAccessibilitySitemapPricing and service information

    Listen to our latest podcast: Budget Miniseries: Impacts on Families with US Connections (Part 1)

    Listen to our latest podcast: Cracking the Code on Directors’ Service Agreements

    Read our latest article: Economist, or just economical with the truth? How can employers respond to ‘fake claims’ on a CV?

    Listen to our latest podcast: Autumn Budget 2024 Special (Part 2)

    Read our latest article: ‘Promoting the integrity of the register’: The new Companies House approach to non-compliance

    ExpandNeed some help?Toggle

    < Back to menu

    I have an issue and need your help

    Scroll to see our A-Z list of expertise

    Get in touch

    Get in touch using our form below.



      Business Close
      Private Wealth Close
      Hot Topics Close