Directors' Duties

THE FOLLOWING IS A BRIEF INTRODUCTION TO YOUR RESPONSIBILITIES AS A DIRECTOR.
IF YOU ARE IN ANY DOUBT AS TO THE EXTENT OF, OR YOUR ABILITY TO FULFIL THESE OBLIGATIONS, THEN YOU SHOULD SEEK INDEPENDENT LEGAL ADVICE.

The powers of a director are those delegated to the directors by the Memorandum and Articles of Association of the company, or where appropriate Table A of the Companies Act (“the constitution of the company”). In practical terms a director can do anything that the company can do and the powers of the company are defined in the Memorandum of Association and contained in what is known as the Objects Clause.

As the company has no tangible existence, the management of its affairs is entrusted to its directors. The directors are therefore said to be both trustees, and agents for the company.

Principal Duties

As a director is the agent through whom the company acts he has certain duties and obligations to the company. These are known as fiduciary duties and a director has two of these to uphold. He must:

1. exercise their powers, granted in accordance with the constitution of the company, in good faith, in the proper manner and for the benefit of the company as a whole; and
2. not to put himself in a position in which his duties to the company and his personal interests might conflict.
   At all times directors must avoid conflicts of interest therefore a director must not do anything for and on behalf of the company where his motivation and loyalties would be divided to the extent that his personal interest may conflict with those of the company.
   As a result a director will be held to account for any loss caused, or any gain he has made, as a consequence of his dealings with the company assets if they are misapplied or used in bad faith for his own purposes. Further, a director will not be entitled to any remuneration from the company, to make any profit out of a transaction without authorisation and he will be bound to fully disclose all material circumstances to the company when contracting with the company or where he has a personal interest in one of the company's transactions.

Directors owe a duty to use reasonable skill and care in discharging their duties and are required to act in accordance with what they consider to be the interests of the company, in good faith and not for any collateral purpose. It maybe that the interests of the company are not always the same as those of the shareholders. It is also important for a director to consider, in general, the interests of employees and, if the company is verging on insolvency then the interests of the shareholders are replaced by those of the company's creditors.

Skill and Diligence

A director in exercising his duties is expected to exercise skill and diligence based on the skill and diligence which could reasonably be expected from a person possessing that director's knowledge and experience. Errors of judgement will inevitably occur but this does not mean that the director will be personally liable.

A director may have additional obligations or duties based on the terms of his service agreement.

Insolvency

A director has additional obligations where a company becomes insolvent, that is where its liabilities exceed its assets or where the company is unable to discharge its liabilities as they become due. There is of course a difference between the company becoming insolvent and the company entering into a formal insolvency process. When a company becomes insolvent the directors need to do everything they can to limit losses to creditors if it appears that there is a prospect of insolvent liquidation. In such a situation a director should not incur further credit. Where wrongful trading can be established, a director will be exposed to the possibility of disqualification from acting as a director and also to the possibility of having to contribute to the amount of any deficiency.