Directors duties.

01.01.06

Directors duties

A brief summary of the responsibilities and duties of company directors.

Many public and quasi-public bodies are associated with (or in themselves are) companies formed under the Companies Act 1985. These can be companies limited by shares or guarantee companies, and may or may not be recognised by the Inland Revenue as charitable.

The day to day management of a company is carried out by its directors. The Companies Act does not specifically define a "director" although it does provide that the term includes "any person occupying the position of a director, by whatever name called". As such, whether those involved in the management of a company are called governors, trustees, board members, office bearers or anything else, they will be regarded for the purposes of the Companies Act as a director, if they are exercising the functions of a director.

A companys internal rules may create a distinction between executive and non-executive directors. This distinction is not recognised by the Companies Act, and the duties and responsibilities of directors apply equally to executive and non-executive directors.

The directors of a company owe their primary duties to the Company itself, to the Company's shareholders or members, creditors, and employees, to their fellow directors, and to the Registrar of Companies.

Duty of Care

A director has two main duties, namely a duty of care and a fiduciary duty. The duty of care requires directors to exhibit a reasonable degree of skill, care and diligence in carrying out their functions. This is a subjective test, and may depend on what would be expected in the same circumstances from a person with that directors knowledge and experience.

Fiduciary Duty

The fiduciary duty requires directors to act in good faith, and in what they consider to be in the interests of the company (i.e. not for the benefit of third parties or for themselves), and not for any collateral purpose. Directors may have to balance a range of interests which may conflict, e.g. certain interests of the Company may conflict with certain interests of its employees.

Still Further Duties

In addition to these duties, particular duties are imposed by the Companies Act. One such duty is to keep proper accounting records, and to prepare and lodge annual accounts, and to make sure that these give a true and fair view of the financial position of the company.

If directors breach their duties, the law provides for a number of remedies. These are usually enforceable by the Company, and may include a claim for damages or compensation. In certain circumstances a third party may also have a claim against a director, notably if the company is wound up and a court finds that the director has acted fraudulently, or if the director has acted in breach of a directors disqualification order.

This update provides a brief overview of the responsibilities and legal duties of company directors and is not an exhaustive list of every duty which a director is under.

For further information, please contact:

Rodger Murray, 0131 656 0198
email rodger.murray@brodies.com