What are a director’s duties?

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Within every company, there will normally be shareholders and a director (or a board of directors). Directors are in charge of the management of a business, and their duties are outlined in the Companies Act 2006.

What duties do company directors have?

Directors are under duties to the company, its shareholders and creditors. They are appointed by the company’s shareholders to manage the business’ day-to-day affairs, including making sure that it meets any relevant statutory obligations.

Where there is more than one director, i.e. a board of directors, decisions should be made together, however, it is common for different directors to have different ‘powers’, e.g. strategic vs. operational.

The consequences of a breach of directors’ duties can be severe and may include personal financial liability, depending on the misconduct.

7 duties of a director

There are seven main duties of a director, which are taken from the statutory statement of directors’ duties. These are:

1. Act within their powers

A director must act in accordance with the company’s constitution and only exercise their powers for the purpose for which they were given. The constitution includes its articles of association and arrangements such as shareholders’ agreements.

2. Promote the success of the company

It may sound like common sense, but a director must act in a way that promotes the success of the company. This means acting in good faith and for the benefit of its members and employees. This includes fostering relationships with suppliers and considering the impact the company’s operations have on the environment, for example.

This duty applies to all directors’ actions, not just those exercised at board meetings.

3. Exercise independent judgement

A director must exercise their powers independently and make their own decisions, without subordinating or delegating their powers to others.

4. Exercise reasonable care, skill and diligence

A director must exercise the skill, care and diligence that would be expected from a diligent person in their position.

5. Avoid conflicts of interest

A company director has a statutory duty to avoid any situation whereby they would have indirect or direct conflicts of interest with any party involved.

This applies in particular to the exploitation of property, information or opportunity, regardless of whether the company could take advantage of it. It applies to a conflict of duty, as well as a conflict of interest, and includes the interests of ‘connected persons’.

6. Not accept benefits from third parties

A director must not accept a benefit, e.g. a gift, from a third party that is given to them because of their position or because of anything they have done within their capacity as a director.

7. Declare interests in transactions or arrangements

The director has a statutory duty to disclose any direct or indirect interest they have in a proposed transaction or arrangement with the company.

It’s important to note that these general duties do not cover all directors’ duties and compliance does not remove the need for shareholders’ approval of certain transactions with directors.

What happens if a director breaches their duties?

If a director breaches one or more of their duties, the remedies for the company include:

  • An injunction against the director (usually when the breach is threatened);
  • Cancellation of the director’s contract;
  • Payment of equitable compensation by the director; and
  • The requirement to account for any profit made by the director

Is a director classed as an employee?

Not necessarily. A person who is a director is an ‘officer’ of the company, which is a constitutional position. As such, they owe certain statutory, equitable and common law duties to the company, as well as having set powers and obligations.

A director may also be an employee of the company, which is a contractual position. Executive directors often have employment contracts in place, which define and extend their duties in return for the payment of a salary.

Where a director is also an employee, they have certain additional rights, including minimum periods of notice to terminate employment if not unfairly dismissed and redundancy pay.

The position is less clear where there is no service contract. In this scenario, the usual employment law tests will apply. It will be a question of fact in each case as to whether a director is classed as an employee. As a result, it is advisable to have a written service contract in place.

How do I remove a director?

If a director is underperforming, or they are in disagreement with the company’s stakeholders, there may be no alternative option but to remove them. To remove a director, the majority of shareholders (over 50%) must serve written notice to the director in question. If the majority do not agree, the director will remain in their position.

A company must have at least one director appointed at all times, which is important to consider when deciding to remove one.

The shareholder or director still retains any accrued employments rights if removed, including those arising out of his service contract. They could also have statutory employment rights including bringing claims for wrongful dismissal, unfair dismissal or possibly redundancy, depending on the facts of the case.

If any director/shareholder feels that the company’s affairs are being conducted in a manner that is ‘unfairly prejudicial, they have a right to petition the court for a remedy. Unfair prejudice is judged on an objective basis from an impartial outsider.

The removal of a director is subject to any rights they have in their employment contract or service agreement. It is therefore important to seek legal advice before doing so to ensure you are not breaching any terms.

Read more about how to remove a director in our blog.

Contact our commercial dispute solicitors

For practical advice about directors’ duties, or if you wish to remove a company director, our commercial dispute solicitors can help. For more information, call us on 0117 325 2929 or complete our online enquiry form.


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