​Knowing Your Duties as a Company Director

Directors must act within the powers that have been conferred on them by the company's constitution and only exercise powers for the purposes for which they are conferred.

'Constitution' is widely defined and includes articles of association, resolutions of its members and can even include shareholders agreements.

In Re Compound Photonics Group Ltd[2022], Snowden LJ confirmed any shareholder agreements must be signed by all shareholders to be deemed as forming part of a company's constitution. 

An example of where a director could be acting outside of their powers would be deciding to issue and allot further shares in the company without regard to any rights of pre-emption contained in the company's articles of association.

Articles of association are complex legal documents, so it is not always straightforward as to what powers directors have.

Legal advice should always be sought if a director does not intimately understand the company's articles of association.

Directors must exercise their own independent judgment when making decisions on behalf of the company without subordinating their powers to others.

For example, if a director is presented with a proposal that would benefit a particular shareholder but would not be in the best interests of the company as a whole, the director must not simply approve the proposal on the instruction of the relevant shareholder.

This will be notwithstanding the terms of any shareholders agreement.

This duty does not, however, prevent directors from relying on professional advice insofar as the directors exercise their own judgment in deciding whether or not to follow the advice.

Without the company's consent, a director must not place themselves in a position where there is a conflict, or possible conflict, between the Duties and either their personal interests or other duties they owe to a third party.

A common example would be where an individual is a director of two different competitor companies or where one company is seeking to obtain goods or services from another, and the individual is a director of both.

This type of situation often arises for non-executive directors with roles in various companies.

It is important to always seek legal advice where a conflict may arise to ensure any conflict is appropriately declared and authorised where possible.

A director is required to declare the nature and extent of any interest that they have in a proposed transaction or arrangement with the company.

This duty applies to any interest, whether direct or indirect, and whether financial or non-financial and the declaration must be made before the company enters into the transaction or arrangement.

Declaration by directors at a board meeting approving a transaction is a vital part of compliance with this duty by ensuring that any director interests are declared.

There is also an uncodified duty owed to creditors that arose in the West Mercia case.

The creditor duty becomes relevant in the context of approaching insolvency, where insolvency proceedings become probable (i.e. this duty can arise before actual insolvency proceedings begin or a formal insolvency process ensues, but there should be more than just a risk of insolvency for the creditor duty to come into play).