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What are directors' duties and consequences of breach?

The Companies Act, 2006, sets out the general duties of company directors in the UK. If you breach these duties the consequences can be severe, with the company, its creditors, or shareholders having the right to pursue you on a personal level for any losses they have suffered.

What are your duties as a director in company law?

To act within your powers

The company’s Articles of Association, along with any relevant shareholder agreements or resolutions, will specify your powers as a director. The essence of this duty is to use the powers of directorship for their intended purpose, rather than for your personal benefit.

To promote the success of the company for the benefit of its members as a whole

When making a decision, you should consider:

  • The long-term ramifications for the company
  • Your employees’ interests
  • Promoting good working relationships with customers, suppliers and the wider business community
  • Whether you are acting fairly between company members
  • The company’s impact locally, and on the environment in general
  • Maintaining the company’s reputation for high standards in business

To exercise independent judgement

You have a duty to maintain independent thought, without being swayed by certain individuals or groups.

To exercise reasonable care, skill and diligence

This is according to your individual skill set and experience, plus those skills that could be ‘reasonably expected’ of a person in your position.

To avoid conflicts of interest

This relates to actual and potential situational and ‘transactional’ conflicts, and incorporates direct and indirect interests.

To not accept benefits from third parties

You must not accept gifts from third parties as a company director.

To declare an interest in proposed or existing transactions or arrangements

Directors need to declare the nature and degree of their interest in any proposed or existing transactions, whether that is a direct or indirect interest.

You also have a duty to place the interests of creditors first when you believe that insolvency is a threat, and to maintain confidentiality with regard to the affairs of the company.

What are the consequences if you breach your duties as a director?

If there is a breach of director duties, it is usually the company itself which takes action. In some instances, one or more shareholders can make a claim against a director if they have suffered personal financial loss or damage, or they believe that other directors may prevent a claim being made by the company.

Consequences of breach can include:

  • Removal from office - if more than half of shareholders vote in favour, you can be removed from office, either temporarily or on a permanent basis.
  • Restoration of company property
  • Setting aside transactions
  • An interim injunction – to prevent any further loss or damage due to a breach of director duty
  • Damages or compensation for financial losses incurred – in serious cases this can result in being pursued through the courts, loss of your home, and ultimate bankruptcy
  • Criminal fines

For more information about your duties as a director, and the consequences of breaching those duties, call our experts at Begbies Traynor. We will clarify your position, and provide professional advice on the next step. Call one of the team for a same-day meeting free-of-charge.

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