Understanding director duties

For directors, good governance is not simply a matter of box-ticking, it’s central to protecting the business, its reputation, and the board itself.

The general duties

The Companies Act 2006 sets out the key general duties directors must comply with. These duties are designed to ensure that directors act honestly, responsibly, and in the best interests of the company. They apply to all directors, whether executive or non-executive, full-time or part-time, paid or unpaid.

The act outlines seven key duties:

1. To act within powers
2. To promote the success of the company
3. To exercise independent judgement
4. To exercise reasonable care, skill, and diligence
5. To avoid conflicts of interest
6. Not to accept benefits from third parties
7. To declare interests in proposed transactions or arrangements

These are not optional guidelines, they are legally binding obligations. Importantly, they apply from the moment a person becomes a director and continue until their resignation or removal has taken full effect.

The duties are not mutually exclusive and more than one duty may well apply to the same situation. Where this is the case, no one duty takes priority over the other.

Consequences of breach

The consequences of breaching the general duties can be significant, both for the company and the individual. The company itself may bring an action against the director, seeking remedies such as:

• An injunction to prevent further misconduct.
• Damages or compensation for losses incurred.
• Restoration of property or profits obtained improperly.
• Rescission of contracts made in breach of duty.

Although it’s rare for shareholders to bring direct action, they can in certain circumstances. For example, through derivative actions, claims for unfair prejudice or by voting to remove a director by majority decision. In more serious cases, misconduct can lead to director disqualification.

Protections and relief

Directors are not entirely without protection. Two key safeguards are:

• Directors and officers insurance: this provides cover for claims arising from negligence, breach of duty, or similar misconduct connected to a director’s role.
• Ratification by shareholders.

Nevertheless, prevention is always preferable to seeking forgiveness after the fact.

Practical steps for directors

Directors can take several practical steps to mitigate risk and demonstrate compliance:

• Hold regular board meetings and ensure that all major decisions are recorded accurately in the minutes.
• Review key procedures/policies regularly, including those relating to data protection, employment practices, and health and safety and take professional advice where needed.
• Declare any personal interests promptly and ensure board approval is obtained for transactions that may involve potential conflicts.
• Implement directors and officers insurance to protect against unforeseen claims or liabilities.

Such practices not only reduce legal risk but also strengthen governance transparency and build confidence with investors and lenders.

Final thoughts

Understanding and fulfilling directors’ duties is not merely about legal compliance, it’s about leadership. By embedding good governance into everyday decision-making, directors can protect themselves and their businesses and set a standard of professionalism that supports success and growth in an increasingly transparent and regulated world.

For more information, please contact our corporate team.