Director’s duties
Directors owe their duties to the company – not shareholders – and so the company will take action against
directors for breach of duty.
Shareholders can take action however – derivative claims
Consider each duty in turn and see if it applies or not to each individual in the question.
S171 duty to act within powers
S172 duty to promote the success of the company
S173 duty to exercise independent judgement
S174 duty to exercise reasonable skill, care and diligence
S175 to avoid conflicts of interest
S176 duty to not accept benefits from third parties
S177 duty to declare conflicts of interests in proposed transactions – CONTRACTS BETWEEN THE
COMPANY AND A THIRD PARTY IN WHICH THE DIRECTOR HAS SOME INTEREST/RELATION TO.
S182 duty to declare interest in existing transactions
Executive director directors and employees of the company – will have a service / employment contract
Non-executive director not involved in day-to-day running of the company
Shadow directors not actual directors – advisory role – but can be held liable to same extent as a
director
Duty to act within powers – s171
Directors have a duty to - act in accordance with the company’s constitution, including its articles and only exercise the powers
which have been conferred to them via the articles.
Breach of duty – the director has acted outside of their powers given to them. This is judged objectively.
Example: the directors have not obtained shareholder approval / have acted beyond the articles …
Duty to promote the success of the company – 172
Directors have a duty to – act in a way which they consider is in good faith when promoting the success of the company in a way
which will benefit the members as a whole.
When acting, the director must consider the non-exhaustive list of factors under 172(1) such as: long term and short term
consequences of their actions / the impact on the company’s reputation / the community / environment / employees / general
operations of the company.
Assess this duty by arguing negative and positives of ‘x’s actions – and go through one by one:
What would be a good and bad long term consequence?
What would be an advantage and disadvantage for the employees?
Would there be a benefit or detriment to the environment or community?
What would be the impact on creditors?
A subjective test is applied to assess this duty meaning we look to how the director honestly thought
their action would promote the success of the company. Therefore, the content or quality of the decision
is irrelevant. APPLY
Breach of duty - Not breached if the director honestly believed it would promote the success of the business.
NOTE: 172(3) says 172 is overruled under 172(3) and favour creditors rather than shareholders / company as a whole.
NOTE: This duty applies to all decision and all directors – not just board resolutions.
Extra – would be appropriate for board mins to reference that this duty has been observed and the factors listed under 172(1)
when decisions have been taken.
Extra – while it must not favour shareholders exclusively – if the actions of the director would result in excessive debt and not
keeping up with interest payments, this could lead to insolvency which would make shareholders lose their investments = could
amount to a breach– is this relevant in this scenario?
Extra – s214 Insolvency Act: directors can be personally liable for wrongful trading (trading without minimising loss to
traders / creditors).
Directors owe their duties to the company – not shareholders – and so the company will take action against
directors for breach of duty.
Shareholders can take action however – derivative claims
Consider each duty in turn and see if it applies or not to each individual in the question.
S171 duty to act within powers
S172 duty to promote the success of the company
S173 duty to exercise independent judgement
S174 duty to exercise reasonable skill, care and diligence
S175 to avoid conflicts of interest
S176 duty to not accept benefits from third parties
S177 duty to declare conflicts of interests in proposed transactions – CONTRACTS BETWEEN THE
COMPANY AND A THIRD PARTY IN WHICH THE DIRECTOR HAS SOME INTEREST/RELATION TO.
S182 duty to declare interest in existing transactions
Executive director directors and employees of the company – will have a service / employment contract
Non-executive director not involved in day-to-day running of the company
Shadow directors not actual directors – advisory role – but can be held liable to same extent as a
director
Duty to act within powers – s171
Directors have a duty to - act in accordance with the company’s constitution, including its articles and only exercise the powers
which have been conferred to them via the articles.
Breach of duty – the director has acted outside of their powers given to them. This is judged objectively.
Example: the directors have not obtained shareholder approval / have acted beyond the articles …
Duty to promote the success of the company – 172
Directors have a duty to – act in a way which they consider is in good faith when promoting the success of the company in a way
which will benefit the members as a whole.
When acting, the director must consider the non-exhaustive list of factors under 172(1) such as: long term and short term
consequences of their actions / the impact on the company’s reputation / the community / environment / employees / general
operations of the company.
Assess this duty by arguing negative and positives of ‘x’s actions – and go through one by one:
What would be a good and bad long term consequence?
What would be an advantage and disadvantage for the employees?
Would there be a benefit or detriment to the environment or community?
What would be the impact on creditors?
A subjective test is applied to assess this duty meaning we look to how the director honestly thought
their action would promote the success of the company. Therefore, the content or quality of the decision
is irrelevant. APPLY
Breach of duty - Not breached if the director honestly believed it would promote the success of the business.
NOTE: 172(3) says 172 is overruled under 172(3) and favour creditors rather than shareholders / company as a whole.
NOTE: This duty applies to all decision and all directors – not just board resolutions.
Extra – would be appropriate for board mins to reference that this duty has been observed and the factors listed under 172(1)
when decisions have been taken.
Extra – while it must not favour shareholders exclusively – if the actions of the director would result in excessive debt and not
keeping up with interest payments, this could lead to insolvency which would make shareholders lose their investments = could
amount to a breach– is this relevant in this scenario?
Extra – s214 Insolvency Act: directors can be personally liable for wrongful trading (trading without minimising loss to
traders / creditors).
