The recent decision of the Court of Appeal for England and Wales in Towers v. Premier Waste Management Limited  EWCA Civ 923, discussed in our recent article, serves as a timely reminder to directors of English companies of the importance of understanding and observing the duties owed to a company of which they are a director. It is worthwhile reminding ourselves of the general duties set out in the Companies Act 2006.
English company law, both statutory and common law, imposes all sorts of quite specific duties on the directors of English companies. For example, director duties are set out in the Companies Act 2006 (the "Act"), the Insolvency Act 1986, the Insolvency Act 2000, and the new Bribery Act 2010 (see our previous Pillsbury publications for more details on responsibilities and exposure of individual directors under the Bribery Act). UK legislation also ranges from those statutes which are generally applicable to almost every type of business entity, such as tax, employment and health and safety, to those that may apply to a company's particular field of business activity or its specific status or form of organisation. Many of these statutes impose personal liability (including criminal liability) on directors found guilty of non-compliance.
In Towers Lord Justice Mummery described a director's duties as "simple, strict and salutary". The decision certainly suggests that "strict" is an apt description, but are the duties really "simple"? In light of the number and kind of duties that a director owes a company, and the multitude of sources in which they are found, Lord Mummery's suggestion that a director's duties be described as "simple" might strike some as having misstated reality. For example, in addition to the duties that have been codified by statute, others, such as the duty of confidentiality, remain uncodified and imposed under the English common law.
It is beyond the scope of this article to survey the entire range of duties and obligations. Instead it will focus on the general duties of a director as set out in Chapter 2 of Part 10 of the Act. In order to consider these duties in context, it is appropriate to start with a fundamental premise of corporate governance and directors' powers. The directors of a company act as a board. When they so act, the company is bound by their actions if they are within the scope of the directors' collective authority established by the company's articles of association. Any limits on the board's powers are typically set out in the company's articles. So what duties does a director owe to the company when exercising these powers?
The general duties of directors under Chapter 10 of the Act are:
- Duty to act within powers
A director must act within the powers conferred upon him or her and the company by the company's constitution and for the "proper purpose".
The Act defines a company's constitution as:
- the company's articles;
- decisions taken in accordance with the company's articles; and
- decisions taken by the shareholders (or a class of them) which can be regarded as the decisions of the company.
The "proper purpose" is a purpose for which the powers were conferred, and will need to be defined in the context of the facts being considered.
This duty may raise concerns for a nominee directors, e.g., a person appointed to the board of a company by a substantial shareholder who has rights to name one or more persons to the board. Such nominee director must be careful to avoid acting in a manner that can be claimed to be in the interests of the appointor rather than of the company, as presumably this favoritism would not satisfy the "proper purpose" requirement.
- Duty to promote the success of the company
A director must act in the way that he or she considers, in good faith, would most likely promote the success of the company for the benefit of its members as a whole. The following factors are set out in the Act for consideration:
- the likely consequences of any decision in the long term;
- the interests of the company's employees;
- the need to foster the company's business relationships with suppliers, customers and others;
- the impact of the company's operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
Notwithstanding this non-exhaustive list of factors, a director also needs to remember that this is not a "tick the box" exercise, and compliance does not require one to demonstrate the satisfaction of each and every item. Rather, each director must have properly considered how best to exercise his or her judgment in good faith, after taking into account the implications any action may have for the company, its shareholders, employees, suppliers, customers, the community and the environment. A tall order indeed.
To make matters more difficult, the Act provides no indication as to the meaning of "the success of the company". The government provides a little guidance in that it views "success" as generally being a "longterm increase in value". This suggests that a director must consider the interests of both present and future members.
Note that in the event that a business decision does not produce the hoped-for results, a director can seek to rely on the "good faith" element in his or her decision-making. However, successfully claiming good faith may not satisfy the duty in section 174 to act with reasonable care, skill and diligence (see below).
- Duty to exercise independent judgment
Directors also must exercise their judgment independently, without subordinating their powers to the directions and wishes of others. Whilst a director can take and rely on the advice of others, it ultimately must be the individual director's own judgment as to whether to follow such advice. In addition, a director is not permitted to limit the fair exercise of individual discretion in a particular matter unless that limitation is authorised or imposed by the company's articles or by an agreement duly entered into by the company.
Nominee directors will also need to be especially aware of this duty and to clearly demonstrate that any decision is made independently.
- Duty to exercise reasonable care, skill and diligence
This duty comes with both an objective and subjective component. A director must exercise the care, skill and diligence that would be exercised by any reasonably diligent person with:
- the knowledge, skill and experience reasonably expected of someone carrying out the same functions as that director; and
- the knowledge, skill and experience which that director actually has.
In addition, the duty of skill and care can also involve the following considerations:
- Whilst a director must diligently attend to the affairs of the company, one is not bound to do so continuously. Rather, the director must keep sufficiently in touch with affairs to ensure that anything which might have a material impact on the financial state, business or assets of the company will be recognised and dealt with promptly.
- A director can rely on the other officers of the company provided there has been proper enquiry of them, and can also delegate power to others where it is reasonable to do so, for example, in the case of accountants or lawyers. However, directors need keep themselves informed of the activities delegated, and are obliged to act themselves when circumstances would put an honest and reasonable person on enquiry as to potential wrongdoing.
- In the absence of breach of a specific statutory obligation, a director is usually not personally liable for civil wrongs committed by the company unless the director ordered or procured the acts in question.
- Duty to avoid conflicts of interest
A director must avoid a situation in which he or she has, or may have, a direct or indirect interest which conflicts, or may conflict, with the interests of the company. The duty applies in particular to the exploitation of any property, information or opportunity irrespective of whether or not the company could take advantage of it.
As demonstrated by the decision in the Towers case (see our recent client alert), and discussed more fully below, directors simply must avoid any situation in which they have, or could have, a direct or indirect personal interest that conflicts, or could conflict, with the interests of the company. This generally applies to third party dealings or opportunities, and there are separate provisions for dealings between the director and the company in sections 177 and 182 of the Act. It is not certain if this duty includes within its scope the equitable rule that a director cannot make secret profits.
In short, where there is any question as to whether there is or may be a conflict of interest, a director must, absent prior board authorization, avoid any situation in which he or she has, or can have, a direct or indirect interest or duty that conflicts or possibly may conflict with the interests of the company. Whilst directors are not under a duty to avoid interests or participation in transactions or arrangements with the company itself, they must disclose any interest in a transaction or arrangement that the company is proposing to enter into, or has already entered into. The director then has a duty to keep the board updated on any changes in that interest. It may also be necessary for the director to consider and disclose the interests of those connected to the director, such as his or her spouse, partner, children and step-children, as this may constitute an indirect interest.
Note that this continuing duty applies to former directors of the company as well.
- Duty not to accept benefits from third parties
A director must not accept a benefit from a third party received because that person is a director, or in connection with doing or not doing anything as a director. The Act does not provide a definition of "benefit" and there is no de minimis threshold.
This duty raises issues similar to the duty to avoid conflicts of interest, and likewise does not apply to benefits received from the company. A director would not be in breach of this duty if accepting the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest, a conflict of interest and duty, or a conflict of duties.
The Act does not provide a mechanism for the acceptance of a benefit to be authorized by the directors. However, the acceptance could be ratified by the company's shareholders. Furthermore, the company's articles could provide that directors may legitimately receive third party benefits up to a certain value, as long as they do not breach the relevant provisions of the Bribery Act 2010. As part of its required procedures to prevent bribery under the Bribery Act, guidance should be furnished by the company as to the circumstances and limits in which acceptance of benefits cannot reasonably be regarded as likely to give rise to a conflict.
This duty also applies to former directors.
- Duty to declare interest in proposed transaction or arrangement
Directors who are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company are required to disclose to the board the nature and extent of that interest. The director need not be a direct party to the transaction if he or she has an interest in another party to the transaction and thus might indirectly benefit.
There are certain limited exceptions to this duty of disclosure, such as where the director is not reasonably aware of his interest or of the transaction, the interest cannot reasonably be seen as giving rise to a conflict of interest (e.g., interests which are de minimis), the other directors are already aware of it, or the director is a sole director (thereby eliminating the slightly odd situation of a director being required to declare the interest to himself).
When a declaration of interest is required, it must be made before the company enters into the transaction or arrangement and may be made at a meeting of the directors and included in the minutes or attendance notes, or by a separate written notice to the other directors. If a declaration of interest proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.
Other duties of directors
As noted above, there are many additional duties imposed by English law on company directors that cannot be found in the Act.
For example, directors are deemed to have a duty of confidentiality. This duty to some extent is similar to the statutory duties to promote the success of the company and to avoid conflicts of interest. Directors clearly obtain a significant amount of confidential and proprietary information in the course of their duties. They are entitled under the Act to receive notice of and to attend all board meetings, and they also have rights to inspect and take copies of many of the records of the company, including meeting minutes. A director also has a common law right to examine the company's books of account in order to be able to discharge his or her duties, and may have a statutory right to examine such books of account for the purposes of complying with the duties imposed by the Act. This access is superior to that permitted to a shareholder, and if not covered by a shareholders' agreement or other company action, the director's duty of confidentiality to the company controls over any conflicting duty or relationship with any shareholder. This duty thus may prohibit the director's disclosure to a shareholder of any confidential information relating to the company which has been gained as a director, even in a case where the director has been appointed by that shareholder.
Another area of potential concern for a director is insolvency of the company.
If a company finds itself in financial distress, whether merely approaching insolvency or actually insolvent, directors must, in certain circumstances, shift their focus from their duties to the company and its shareholders, and also consider or even act in the interests of creditors of the company. While this does not mean that the directors should ignore other considerations, the interests of creditors will assume prime importance. In these circumstances a director may have additional concerns under the insolvency legislation. The three most typical issues or areas of concern are wrongful trading, fraudulent trading and disqualification. Discussion of these is beyond the purview of this article, but it is worth noting that, under the Company Directors Disqualification Act 1986, where any wrongful acts or trading have occurred, a court may make a disqualification order that a person shall not, without leave of the court, be a director of a company or in any way, directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a specified period beginning with the date of the order. The minimum period of a disqualification order is two years and the maximum is 15 years.
Statutory duties generally are enforceable in the same way as any other fiduciary duties and breach can give rise to a number of potential remedies, including paying damages/compensation to the company and accounting to the company for any profit made. The duty to exercise reasonable care, skill and diligence, whilst not a fiduciary duty, can still upon breach result in an award of damages.
Also of significance is that the Act, with some exceptions, renders void any indemnity given by a company to a director against liability for his negligence, default, breach of duty, or breach of trust in relation to the company. This also applies to any arrangement exempting the director from such liability. Nevertheless, a company is not prohibited from taking out and paying for insurance against such liability, and it is quite common for companies to obtain such insurance for the benefit of their directors.
While one may doubt the accuracy of Lord Justice Mummery's description of a director's duties under English law as "simple", the directorship position can still be a satisfying one if the director keeps to mind his or her obligation to act with reasonable diligence and in accordance with the highest standards of propriety. Nevertheless, given the complexities, it would be wise for any person, in considering whether to accept a directorship or in performing the duties of that office for an English company, to obtain and rely on competent professional advice. If these "simple" standards are met, a director should feel reasonably confident that he or she can successfully discharge the duties, and avoid the pitfalls, which the position entails.