Understand your duties as a company director

The general duties in the Companies Act 2006 apply to every director, whatever their title, and to a shadow director so far as a duty can apply to them. You owe them to the company, not to individual shareholders, other directors or employees. The statutory duties are based on the old common law and equitable rules and replace them, but courts interpret and apply them in the same way, so earlier case law still guides them.

The seven duties

What the duties mean day to day

Act within your powers. Follow the company's constitution, and use each power only for the purpose for which it was given, even where the constitution lets you use it.

Promote the company's success. You must act in the way you consider, in good faith, most likely to promote its success for the members as a whole, and have regard to a set of wider factors on the way.

Recording in the minutes which factors you weighed on a significant decision helps if the decision is later questioned.

Use independent judgment. You cannot commit in advance to vote as someone else directs. The exceptions are acting under an agreement the company itself has properly entered into that restricts how directors use their discretion, and acting as the constitution authorises. A director whom an investor nominated still owes the duties to the company, not to the investor.

Use reasonable care, skill and diligence. The test has two limbs: the knowledge, skill and experience that someone doing your job in that company could reasonably be expected to have, and the knowledge, skill and experience you actually have. A qualified accountant who is finance director is held to a higher standard on the accounts than a director without that training.

Avoid conflicts of interest. This covers any situation in which you have, or could have, an interest that conflicts or may conflict with the company's, and in particular using the company's property, information or opportunities, even if the company could not itself have taken advantage of them. It does not apply to a transaction or arrangement with the company, which the duty to declare interests covers. After you stop being a director, you remain bound by this duty for property, information or opportunities you learned of while a director.

The duty is not breached if the situation cannot reasonably be regarded as likely to give rise to a conflict, or if the directors authorise it. A private company's directors can authorise a conflict unless the constitution invalidates that. A public company's directors can do so only if the constitution allows it. Authorisation works only if the quorum is met without counting you or any other interested director, and the matter would have been agreed without your vote.

Do not accept benefits from third parties. You must not accept a benefit conferred by reason of being a director, or of doing or not doing something as a director. The duty is not breached if accepting the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest, so modest hospitality is generally safe, whereas a significant gift from a supplier is not.

Declare your interests. You must tell the other directors the nature and extent of any interest in a proposed transaction or arrangement with the company before the company enters into it.

If you breach a duty

The consequences are the same as for the corresponding common law or equitable rule. Duties other than reasonable care, skill and diligence are enforceable like any other fiduciary duty owed to the company. The company decides whether to sue, and a member can bring a derivative claim on the company's behalf, but only with the court's permission.

Relief and protection

Members can ratify conduct that amounts to negligence, default, breach of duty or breach of trust, by passing a resolution. The votes of the director and of any member connected with them do not count towards the majority.

A court can also relieve you in whole or in part if you acted honestly and reasonably and ought fairly to be excused, and you can ask it to do so if you expect a claim.

Any provision that purports to exempt a director from liability for negligence, default, breach of duty or breach of trust towards the company is void. The company cannot indemnify you against such liability either, except that it can buy insurance for you and can give a qualifying third-party indemnity. That indemnity covers only liability to people other than the company. It cannot cover criminal fines, regulatory penalties, or the costs of a failed defence of criminal proceedings or of a claim brought by the company.