5. Directors' Duties and Powers

Question 1

Powers of Directors: From where do the Directors derive their powers?

Answer 1

In the UK, the Directors derive their powers from its Articles of Association. Articles typically delegate wide powers to Directors otherwise decisions would be left to shareholders majority vote which is impractical, particularly to listed companies with thousands of shareholders.

Question 2

What is the ‘general management clause’?

Answer 2

Article 3 of the CA2006 Model Articles for Public limited companies states “Subject to the Articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise allthe powers of the company.”

The directors must exercise these powers collectively (not individually), unless they are allowed under the Articles to delegate those powers to an individual director/someone else.

Question 3

Where can the general management clause be subject to limitations?

Answer 3

1. An objects clause which limits the powers of the company (e.g. if the objects clause limits the type of business a company can do, the directors would be in breach of s171 if they decided to do business in an area not covered by the objects clause);
2. An article imposing a specific limit on the directors powers (e.g. a borrowing limit);
3. An article allowing the members to give directions to the directors;
4. A sharehders agreement which requires shareholder approval for certain types of decisions; and
5. The Companies Acts or other rules and regulations - which often impose a requirement for shareholder approval and may impose procedural conditions.

Question 4

What are the Directors Duties according to the Companies Act 2006?

Answer 4

S.171 = To act within their powers in accordance with the company’s constitution (and to use those powers for proper purpose).
S.172 = To promote the (long term sustainable) success of the company, considering the long-term consequences of any decision and the interests of all of its stakeholders (including employees, suipliers, customers, community and environment).
S.173 = To exercise independent judgement (unless restricted from doing so by an agreement).
S.174 = To exercise reasonable care, skill and diligence (reasonably diligent test).
S.175 = To avoid conflicts of interest (direct or indirect or potential e.g. property, information or opportunity).
S.176 = Not to accept benefits from third parties.
S.177 = To declare any interests in proposed transactions or arrangements (aware or should have been aware). May result in voiding transaction and director subject to criminal penalty).

Question 5

What are the tests for determining whether a person is “reasonably diligent”?

Answer 5

1. They have the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (objective test), and
2. The general knowledge, skill and experience that the director actually has (subjective test).

Question 6

Who generally brings actions against directors?

Answer 6

Generally, it is insolvency practitioners as actions usually arise after a company goes into liquidation.

A shareholder (or shareholders i.e. derivative actions) can also bring actions against a director, in relation to an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust.

Usually based on fraudulent (criminal offence) or wrongful trading (civil offence).

Question 7

What is the purpose of Directors’ and Officers’ insurance?

Answer 7

The core purpose of a D&O insurance policy is to provide financial protection for directors against the consequences of actual or alleged “wrongful acts” when acting in the scope of their duties. These include:
- breach of trust
- breach of duty
- neglect
- error
- misleading statement
- wrongful trading

The D&O policy will pay for defence costs and financial losses (e.g. fines or civil penalties).