Directors’ Duties – The Points That Still Catch People Out

Company directors will generally be aware that they owe duties under the Companies Act 2006. However, in practice, a number of those duties continue to surprise even experienced business owners.

The starting point is that directors owe their duties to the company itself, not to shareholders (even majority or appointing shareholders).

Two areas in particular frequently cause issues.

First, the rules on conflicts of interest are much wider than many expect. A director must avoid not only actual conflicts, but also situations where a conflict could arise – including indirect or potential conflicts. This can cover common scenarios such as holding interests in competing businesses, or pursuing opportunities that overlap with the company’s activities.

Closely linked to this is the rule that directors must not take corporate opportunities for themselves. This applies even where the company may not be in a position to pursue the opportunity itself, and even where no loss is suffered.

Secondly, directors should be aware that certain duties can continue after they leave office. In particular, the duty to avoid conflicts still applies in relation to the use of information, property or opportunities obtained while acting as a director. Former directors cannot simply rely on resignation to pursue those opportunities freely.

A further point that is often overlooked is that directors cannot avoid responsibility by claiming lack of knowledge. The duty to exercise reasonable care, skill and diligence requires directors to properly inform themselves and monitor the company’s affairs, and liability can arise where issues go unnoticed which ought reasonably to have been identified.

Finally, the position changes where a company is or is approaching insolvency. In those circumstances, directors must have regard to the interests of creditors, rather than focusing solely on shareholders.

It is also worth noting that compliance is not simply a matter of outcome. A director may still be in breach even where:

• the company suffers no loss; or
• the transaction in question was commercially beneficial.

The focus is on the director’s conduct and position, rather than the result.

Directors’ duties are deliberately broad and, in some areas, unforgiving. The real risks tend to arise not from deliberate misconduct, but from assumptions — about conflicts, about opportunities, about what you can do after stepping down, or about whose interests matter in a crisis.

Those assumptions are often wrong — and when they are, the personal consequences can follow quickly.

For advice on directors’ duties or any other company law matters, please contact our Corporate and Commercial department on 0116 289 7000 or info@bhwsolicitors.com.