Introduction to directors' legal duties
This article is based on UK law.
Introduction
It must be admitted that directors’ legal duties are onerous and
the penalties for breaching them can be stiff. But it is important
to remember that there is no expectation of perfection or
infallibility. The overriding legal requirement is to act honestly,
competently and conscientiously.
Provided directors have a proper understanding of their role and
take basic protective measures, the risks of committing a breach of
duty can be kept to an acceptable level.
The nature of a director’s relationship with the company and
the shareholders
Many of the duties imposed under the law arise because the
director acts as a fiduciary for the shareholders of the company. A
fiduciary is someone who exercises powers or holds money or assets
on behalf of others. Thus, the trustee of a family trust is a
fiduciary for the beneficiaries; a solicitor holding money for a
client is a fiduciary for that client.
The law and the judges provide protection for those on whose
behalf fiduciaries act.
Directors should always see themselves as custodians of the
company: its assets are not theirs to deal with solely as they
wish.
The extent of a director’s power and authority
Directors do not have unlimited powers to run a company on
behalf of the shareholders. They may only exercise the powers
granted to them either by the general law or by the company’s
constitution (see our OUT-LAW guide to The
company constitution). For that reason, most companies will
have an article on the lines of: “the directors are responsible for
the management of the company’s business, for which purpose they
may exercise all the powers of the company”.
Unless specific powers and authority have been delegated to a
named director, it will usually be the case that powers can only be
exercised by the board of directors acting together as a body.
Types of director
Does the law differentiate between types of director? Not as
much as the layman might imagine. Individuals can perform
significantly different roles but still have the same (or similar)
legal accountability, as can be seen below.
Executive directors
An executive director is a director who is also an employee of
the company. Their contract of employment will impose specific
duties: for example, a finance director will be responsible for the
day to day management of the company’s finances.
Non-executive directors
Non-executive directors, by contrast, are not employees of the
company. They will usually have a non-executive appointment letter
rather than a contract of employment. That means they are paid
fees, not salaries. They will usually be part-time and will not be
expected to be involved in the day to day running of the company.
Despite this, there is no legal distinction between executive and
non-executive directors. Many of the duties placed on them will be
the same.
Shadow directors
Shadow directors are those who, while not having formal titles
or appointments, act as if they are directors and have a history of
influencing the board.
A shadow director may be held equally liable with the formally
appointed directors for the consequences of an insolvency
The safest course is to assume that if you are a director of a
company or act (in the eyes of the law) as if you are, you will be
personally accountable when things go wrong.
Prohibitions on acting as a director
The Companies Act 2006 excludes the following from being
directors:
- undischarged bankrupts;
- people disqualified under the Company Director’s
Disqualification Act 1986;
- people under 16 (this is a change to the law, effective October
2008).
Further restrictions may be imposed by the articles of
association; it used, for example, to be common for the articles to
require a director to hold shares in the company.
The 2006 Act removes the rule that directors of a public company
have to go when they reach 70 unless the articles or shareholders
say otherwise; from April 2007, there has been no upper age
limit.
Delegation of duties
Directors should be aware that when they delegate any of their
duties to others, including the company secretary (see our OUT-LAW
guide to Company personnel), the
responsibility and liability for fulfilling those duties remains
with them.
The directors should periodically satisfy themselves that the
secretary or other delegate is carrying out his or her tasks
properly and that all legal requirements are being met. Any warning
signs to the contrary should be followed up.
