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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.

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Published 5 July 2023

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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.

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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

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.

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