Directors Fiduciary Duties
Directors of any company in the UK are separate from the business owners, who are the Shareholders, and have a duty to manage the company (or companies), over which they are appointed, solely in the interest of Shareholders.
This theoretically simple relationship can lead to problems arising from any confusion between a Director’s understanding of his/her duties, their interest as a Shareholder and the need to have consensus between Directors to ensure their management of the company is effective. This becomes even more complicated as the company becomes more successful.
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Directors’ duties were historically set down by a series of legal cases stipulating the interests which Directors serve, the need for independence, the need to act objectively, the need to remain loyal to the original purpose of the company and the need to ensure good company management. These are known as “fiduciary duties” and reflect those duties which exist where there is a relationship of trust and confidence, as essentially the Shareholders are entrusting their investment to the hands of Directors.
These decisions in the Courts led to Directors’ duties being codified in the Companies Act 2006 which set down the following fiduciary duties:
- A Director must only act within the powers as granted by the Company’s constitution.
- A Director has a prime duty to promote the Company’s success (unless insolvent).
- A Director must exercise independent judgment.
- A Director must exercise reasonable care, skill and diligence in his/her role.
- A Director must avoid conflicts between his/her role and his/her personal interests.
- A Director cannot accept benefits from third parties which arise from his/her role.
- A Director must always declare to other director his/her personal interest in any transaction or arrangement which the Company proposes to enter into.
There are of course exceptions to the above restrictions, but also strict penalties which a director may be personally liable for. Please see our booklet entitled Breaches of a Director’s Fiduciary Duties for more information on the risks that a Director may face personally.
Directors are also subject to other legal requirements, to ensure confidence is maintained in the UK economy and the risk of fraud is mitigated. A lot of these requirements exist within the Companies Act 2006, such as the duty to ensure regular financial accounts and other statutory documents are filed through to the requirement to maintain appropriate accounting records so as to enable Directors to regularly understand the Company’s financial position.
For legal and public policy reasons, Directors also have non-fiduciary duties to the general public and, in particular, potential customers. These duties can include a prohibition on certain types of marketing which may misrepresent the Company’s goods/services or permitting misleading information to be provided on financial or investment proposals entered into either with the Company or third parties.
Directors’ duties are the target or much greater scrutiny and the requirement for transparency now and at Francis Wilks & Jones we can advise all interested stakeholders on such matters.
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