Company Directors' Legal Duties

Companies Act 2006: Directors legal duties (including CICs)

The Companies Act 2006 outlines the fundamental legal duties and responsibilities of directors, ensuring that they act in the best interests of their company and its stakeholders. These duties apply to all company directors, including those of Community Interest Companies (CICs) and other non-profit organisations. This document provides an overview of the key legal obligations directors must adhere to, including acting within their powers, promoting the success of the company, exercising independent judgment, and managing conflicts of interest. By understanding and following these principles, directors can ensure compliance with the law while fostering good governance and ethical decision-making.

More recent changes to Company Law and legislation related to corporate bodies.

Key legal obligations for Directors

The following list described key legal obligations or duties, of Directors under the Act.

1. Duty to Act within Powers (Section 171)

• Description: Directors must act in accordance with the company’s constitution and only exercise their powers for their intended purposes.
• Key Points: Be familiar with the company’s Articles of Association and any other governing documents.

2. Duty to Promote the Success of the Company (Section 172)

• Description: Directors must act in a way they believe will most likely promote the success of the company for the benefit of its members as a whole.
• Considerations: Factors include long-term consequences, interests of employees, relationships with suppliers/customers, community and environmental impact, maintaining a reputation for high standards, and acting fairly between members.

3. Duty to Exercise Independent Judgment (Section 173)

• Description: Directors must make their own decisions and not merely follow instructions from others.
• Key Points: Avoid undue influence and ensure decisions are in the company’s best interest.

4. Duty to Exercise Reasonable Care, Skill, and Diligence (Section 174)

• Description: Directors must perform their role with the care, skill, and diligence expected from someone with their knowledge and experience.
• Key Points: Stay informed about the company’s affairs and apply relevant expertise.

5. Duty to Avoid Conflicts of Interest (Section 175)

• Description: Directors must avoid situations where their personal interests conflict with the interests of the company.
• Key Points: This includes direct and indirect interests and extends to potential conflicts.

6. Duty Not to Accept Benefits from Third Parties (Section 176)

• Description: Directors must not accept benefits (including bribes) from third parties that could create a conflict of interest.
• Key Points: This duty aims to prevent corruption and maintain integrity.

7. Duty to Declare Interest in Proposed Transaction or Arrangement (Section 177)

• Description: Directors must declare any interest in a proposed transaction or arrangement with the company.
• Key Points: The declaration must be made before the company enters into the transaction.

Specific Considerations for Companies Limited by Guarantee

• Non-Profit Orientation: Many companies limited by guarantee are non-profit organisations, charities, or community interest companies. Directors should ensure their actions align with the company’s non-profit purposes.

• Members Instead of Shareholders: These companies usually have members rather than shareholders. Directors should act in the best interests of the members and the company’s stated objectives.

• Asset Lock: If the company has an asset lock (common in charities and community interest companies), directors must ensure that assets are only used for the benefit of the company’s purposes.

Enforcement and Consequences

• Breaches: Directors can face consequences for breaches, including personal liability for any losses, disqualification from acting as a director, and potential criminal penalties for certain breaches.

• Derivative Claims: Members may bring derivative claims on behalf of the company if directors breach their duties.