Directors of a limited company have a combination of both common law and equitable duties they must adhere to when discharging their fiduciary duties owed to the company as directors. Directors of a limited company have a legal duty and obligation to act in good faith and in the best interests of the company.

The duties owed by a director to the company provide a mechanism for examining, investigating, and, if necessary, holding the director to account for his management, direction, and financial decisions within the company. This provides a regulatory framework for examining and critically analysing the director's conduct and behaviour.

Breach of Director Duties

If a director falls below the standard required of him or is found to be in breach of his duties owed to the company, the director could then be exposed to and face serious consequences in relation to his behaviour, including:

  • Personal Liability: The director could be pursued to repay and/or reimburse any losses the company has incurred that are directly linked to the director's behaviour.
  • Termination: The director could be removed from his position with immediate effect.
  • Disqualification: The director may be disqualified from acting as a director of a limited company for up to 15 years.
  • Legal Action: The company itself could bring a claim against the director who has failed to fulfil or exercise his duties.

Directors must therefore not be appointed unless they can effectively and in full satisfy, discharge, and owe the duties owed by them to a company. Any failure by a director to do so could result in personal liability, including disqualification.

The Seven Legal Duties Owed by a Director to a Limited Company

The Companies Act 2006 ('CA 2006') sought to codify, remove any uncertainty and provide a statutory framework setting out what duties a director owes to a limited company. These are as follows:

1. Duty to Act Within Powers

A director must adhere to the company's constitution and exercise powers only for the purposes for which they were given. (Section 171 of the CA 2006)

2. Duty to Promote the Success of the Company

A director must act in good faith and would be most likely to promote the company's success in a way believed to benefit the company's members as a whole. (Section 172 of the CA 2006)

3. Duty to Exercise Independent Judgment

A director must make decisions based on and exercise their own independent judgment rather than being unduly influenced by third parties and others. (Section 173 of the CA 2006)

4. Duty to Exercise Reasonable Care, Skill, and Diligence

A director shall apply his knowledge, skill and experience that a reasonable person in his position would be expected to have and therefore discharge as director. (Section 174 of the CA 2006)

5. Duty to Avoid Conflicts of Interest

A director shall not allow his personal interests to conflict with those of the company. A director must declare any potential conflict to the other directors of the company. This includes the director not making any secret profit or otherwise taking advantage of his position as director. (Section 175 of the CA 2006)

6. Duty Not to Accept Benefits From Third Parties

A director shall not accept any benefit from a third party as a result of their role as a director or by not doing something as a director. (Section 176 of the CA 2006)

7. Duty to Declare Interests in a Proposed Transaction or Arrangement

If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors. (Section 177 of the CA 2006)

Potential Causes of Action Against a Director

In the event a director breaches his director's duties, he could be personally liable, as set out above. Often, the most popular causes of action against directors allegedly failing to adhere to their directors' duties are as follows:

Director Disqualification

In the event a company has been placed into insolvency, the Secretary of State for Business and Trade ('SOS'), usually through its investigative arm, the Insolvency Service, will then investigate the circumstances of how and the reasons why the company was placed into insolvency, including investigating the director's conduct.

In the event the investigation finds supporting grounds, the SOS then have the ability to seek a Disqualification Ban against the director, prohibiting him from being a director of a limited company up to a maximum period of 15 years and potentially also seeking a Compensation Order ('CO') from the director pursuant to the Company Directors Disqualification Act 1986.

Misfeasance Claims

Misfeasance claims are usually brought against company directors pursuant to Section 212 of the Insolvency Act 1986. Claims usually pursued will be that the director misapplied company funds or other company assets, and that he should repay the company for those funds or assets. For example, the director has an alleged overdrawn Directors' Loan Account, or is taking excessive dividends at a time when the company had insufficient funds to pay them.

Other Financial Recovery Claims

The Liquidator's claims for financial recovery, usually pursued against a director, can be found at:

  • Section 213 Insolvency Act 1986 (Fraudulent Trading)
  • Section 214 Insolvency Act 1986 (Wrongful Trading)
  • Section 238 Insolvency Act 1986 (Transactions at Undervalue)
  • Section 239 Insolvency Act 1986 (Preference Payments)

The above is not intended to be an exhaustive list, but rather provides a snapshot of the potential outcomes and/or allegations a director could be subject to if he fails to adhere to the strict directors' duties set out in Sections 171 to 177 of the CA 2006.

How D&N Solicitors Can Help

This firm is regularly instructed by company directors who find themselves subject to claims pursued by the SOS, the company's Liquidator, and, in some circumstances, both at the same time. This firm has a proven track record of working with clients in a structured, cost-effective, and coordinated manner to achieve an amicable resolution.

You can see the impact of that approach in the outcomes we've secured. Many of our recent cases show how a targeted strategy, careful engagement with regulators, and a calm understanding of the process can turn what feels like an impossible situation into a manageable and often positive outcome. Our successes page outlines several examples of clients who have avoided disqualification, reduced exposure, or brought lengthy investigations to an end far sooner than expected.

If you have any queries arising from the above or are being pursued by either the SOS or a Liquidator, please do not hesitate to contact us. We at D&N Solicitors will be more than willing to assist in any way that we can.