What obligations does a director have?
Becoming a director gives status and a direct impact on the strategy and success of a business. How free is a director to act alone? What obligations and duties should a director bear in mind?
Day-to-day management of a company is delegated to the directors by its shareholders. Directors are initially appointed by the shareholders and can usually themselves appoint additional directors up to any limit set by the articles of association.
The decisions of the directors are taken collectively by the board of directors. A director cannot act as a director on his own unless only one director has been appointed. Decisions are either taken by majority vote at board meetings or by the signing by all the directors of a written resolution.
The director's role and his powers are primarily defined in the company's articles and, if he is also an employee, in his service contract.
The mere fact of appointment does not normally give a director any executive powers. Most directors are, however, also employees of the company with specific powers delegated to them. A managing director usually has extensive powers to take day-to-day decisions on behalf of the company. Other directors such as sales directors or finance directors will have a more limited role.
Directors owe a duty to the company and, if insolvency threatens, to creditors. Certain key duties of directors have been placed on a statutory footing under the Companies Act 2006 (the "Act"). These duties are owed to the company.
Directors are also subject to a number of other statutory requirements and restrictions. These include a duty to keep proper books and records and restrictions on entering into certain transactions with the company or accepting loans from the company. Breach of these duties and requirements can result in a director being disqualified from acting as a director and in many cases can lead to the director incurring personal liability. Insurance can be obtained to cover some cases of personal liability.
The directors act as a board but the board may (if the articles permit, as they generally will) delegate powers to a committee of board members or to an individual director.
Non-executive directors are, as their name implies, directors to whom no executive powers have been granted by the board. Although they have no executive powers, they can vote at board meetings and have the same duties as executive directors.
Executive directors are generally employees with specific powers delegated to them either by a resolution of the board or under their service contracts.
Most companies have a managing director (sometimes called a chief executive). He is granted more extensive executive powers by the company's articles or by board resolution.
Directors should not act outside the scope of the powers delegated to them. Major contracts and commitments should always be authorised by board resolution. A director who exceeds his powers (for example, by signing a contract not authorised by the board) may incur personal liability for the performance of the company's obligations under that contract. However, he will be relieved from such personal liability if the board subsequently ratifies his actions.
If a director is liable for conduct amounting to negligence, breach of duty, default or breach of trust, the power to ratify such conduct lies with the shareholders. The shareholder resolution ratifying such conduct must be passed without counting the votes of the director concerned (if a shareholder) or those of any connected person.
A director's general duties are owed to the company and not to individual shareholders. The Act codifies certain key duties, as follows:
- Duty to act within powers (section 171)
- Duty to promote the success of the company (section 172)
- Duty to exercise independent judgment (section 173)
- Duty to exercise reasonable care, skill and diligence (section 174)
- Duty to avoid conflicts of interest (section 175)
- Duty not to accept benefits from third parties (section 176)
- Duty to declare interest in proposed transaction or arrangement (sections 177 to 185)
Other (non-statutory) general duties
Other, non-statutory duties which a director may owe to a company include a duty not to misapply the company's property and a duty of confidentiality.
Director's service agreements
An executive director will usually have a written contract of employment, commonly known as a service agreement. An executive director who is an employee will benefit from various employment laws, including the right to a statutory minimum notice period, the right to be paid at least the national minimum wage, the right not to be unfairly dismissed, following completion of the requisite period of qualifying service and protection from discrimination.
If the director is to serve as a non-executive director, they will not normally have an employment contract or service agreement but a letter of appointment. A non-executive director's letter of appointment should, amongst other things, state the minimum time that the non-executive director will be required to spend on the company's business and seek confirmation from the non-executive director that he can devote that time to the role. Non-executive directors are not employees and do not benefit from employment rights. However, any fees paid to a non-executive director for their director services must be paid subject to deduction of tax PAYE like an employee.
Being a director brings with it a high degree of responsibility and, increasingly, the risk of personal liability. Directors are not generally personally liable to third parties, unless they have given a personal guarantee for the liabilities of the company. However, various statutes have imposed personal liability on directors in a wide range of situations, including health and safety, environmental, competition and securities matters.
"A director's general duties are owed to the company and not to individual shareholders."