Corporate Law July 2005

Jan Winstanley
Corporate Lawyer Writes
Jan Winstanley

Director's Duties

Being a director of a company is not simply a matter of status. All directors should be aware of the large number of duties which fall upon them as a result of their directorship. This article aims to deal with certain of those duties, but it is important to understand what makes a director and to remember that being formally appointed is not the only way in which you can acquire a director’s duties and responsibilities.

Am I a “director”?

  • Have you assumed the office of director without being formally appointed? Do you act like a director? If so, you may be a “de facto director”, and therefore owe duties as a director to the company just as if you had been formally appointed.

  • Are you a “person in accordance with whose instructions the directors are accustomed to act”? Do you exercise real influence over the majority of board members? If so, you may be a “shadow director” and owe duties as a director to the company.

If you have been appointed as a director, or you believe you may be a de facto or shadow director you have a fiduciary duty to the company. There are various specific duties to consider but a useful general rule is that if you have a fiduciary duty to the company, you must ensure that you are always acting “in the best interests of the company”.

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Specific areas where these considerations may arise are:-

Duty of skill and care

Your standard of “skill” will be judged subjectively. In other words, the skill expected of you will be that reasonably expected from a person with a similar level of knowledge and experience. If you are a director who is professionally qualified (like an accountant or a lawyer) or who has many years’ experience in a certain field, then a greater degree of skill will be expected of you.

Your standard of “care” is judged objectively, and therefore you are required to exercise a degree of care which a reasonable person would exercise.

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Duty to avoid conflicts of interest

There is a general rule, established by case law, that a director of a company is permitted to hold a directorship in a company which competes with another company of which he is a director. However, this is clearly at odds with the fiduciary duty to the company which prevents directors from putting themselves in a position of conflict of interest, and therefore any other business interests of directors should be considered carefully and may need to be disclosed and properly documented. Conflicted directors may need to disqualify themselves from certain decision making processes where there is such a conflict to avoid a breach of fiduciary duty. If a director does engage in a competing business, particularly if company information is used, he may be called upon to account for any profits made.

Remedies for breach of duty

The principal remedies against directors found to have breached their duties are:-
Accounting for profits;
Injunction;
Summary dismissal;
Damages.

Each of the above can have serious consequences for a director and for this reason it is crucial to understand your obligations and duties and to bear these in mind above all else when making business decisions

If you require any further information please contact Jan Winstanley at Kuit Steinart Levy on 0161 832 3434 or by email: janwinstanley@kuits.com