Directors' Duties

Directors manage the company’s business on behalf of its members (shareholders). They act as an agent of the company. Directors have duties under legislation (Company Law and Insolvency Law) and under Common Law.

If a director is in breach of these duties of his or her office then s/he may be held personally liable.

What are the duties?

The majority of The Companies Act 2006 came into force on 1st October 2007. One of its most significant changes is a new statutory statement of directors' duties which aims to clarify the law for directors by providing a single reference source setting out their duties. The statement codifies (although not without some significant changes) and replaces the common law and fiduciary duties that have been developed by the courts.

Despite this the caselaw remains relevant as the Act expressly states that regard should be had to it when interpreting the Act. It is therefore clear that the Act does not achieve creating a single source of reference for director's duties.

Under The Companies Act 2006 a director has duties to;

  • Act within powers granted under the companies constitution. This includes using powers solely for the purpose they are intended.
    • Hogg v Cramphorn Ltd [1967] Ch 254
  • Promote the success of the Company. This means acting in a way in which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. This replaces director's fiduciary duties.
    • Case examples include Smith v Fawcett [1942] Ch 304 and Heron International Ltd. V Grade (1983) BCLC 313
  • Exercise independent judgment.
  • Exercise reasonable care, skill and diligence. This is an objective test.
  • Avoid conflicts of interest and of duties.
    • e.g. Aberdeen Railway Co. v Blaikie Brothers 1854 1 Macq 461
  • Not accept benefits from third parties.
  • Declare interest in proposed transaction or arrangement. This must be done before the transaction is entered into. A director need not be a party to the transaction to be 'interested' in it.

Exemptions from the statutory duties are not generally permitted, although certain exceptions to this can be found in s. 177. One further point is that members of a company may ratify a director's breach of duty as long as this is conducted in accordance with s.239.

When can a director be personally liable?

As a director is an agent of the company, they can be held responsible for any actions they take on behalf of the company that breach the competition regulations set out below.

Personal Liability can also occur if a director has been involved in:

  • Fraudulent trading
  • Failing to file and maintain records in accordance with the Companies Act 1985
  • Potential criminal liability under e.g. Health & Safety regulations
  • Potential liabilities to third parties under e.g. Environmental legislation
  • Disqualification under the Company Directors Disqualification Act 1986

The Competition Act 1998

This act prohibits anti-competitive behaviour between undertakings in the UK.

What is an undertaking?

An undertaking is any company, firm, business, sole trader, or any other natural or legal person capable of carrying on commercial activities relating to goods or services.

What does this Act do?

It has two main areas of regulation:

1. The prohibition of anti-competitive agreements
2. The prohibition of abuse of a dominant position in a market.

This broadly mirrors Articles 81 and 82 of The EC treaty.

What is an anti-competitive agreement?

This means that no undertaking may make an agreement with another undertaking that would prevent, distort or restrict competition within the UK.

In particular this refers to:

  • Price fixing (indirectly or directly)
  • Limiting production, markets or investment
  • Sharing markets or sources
  • Introducing unconnected supplementary obligations to contracts
  • Applying dissimilar conditions to equivalent transactions.

Are there any exemptions?

In order to be exempt from this legislation, an agreement must contribute to

i) Improving production or distribution, or
ii) Promoting technical or economic progress.

How do I secure an exemption?

Applications must be made in writing to the Director General of Fair Trading (The Director).

The Director may cancel or vary such an exemption by notice in writing if he has reasonable grounds for believing there has been a material change in circumstances since it was granted.

What is the abuse of a dominant position?

Similar to anti-competitive agreements, conduct that:

  • Directly or indirectly fixes prices
  • Limits production or technical developments
  • Introducing unconnected supplementary conditions to a contract
  • Applying dissimilar conditions to equivalent transactions and therefore placing other parties at a disadvantage.

The Enterprise Act 2003

This act outlines the Criminal Sanctions that a Director may face if s/he commits a ‘cartel offence’

What is a cartel offence?

It is an offence for individuals to dishonestly engage in cartel agreements with other persons who are at the same level as them in the production/supply chain. (i.e. their direct competitors.)

It is an offence to either make or implement such arrangements.

What is a cartel agreement?

This is an agreement between undertakings (any company/ firm/ business/ partnership) that intends to result in any of the following:

  • Price-fixing
  • Limitation on supply or production
  • Sharing market information
  • Bid-rigging.

What has changed?

The Enterprise Act introduces criminal sanctions alongside the financial penalties that may be imposed under the Competition Act 1998.

What are these criminal sanctions?

If convicted under summary trial then they are:

  • Maximum of 6 months imprisonment and/or maximum statutory fine.

If convicted on indictment then they are:

  • Maximum of 5 years imprisonment and /or unlimited fine.

How can I avoid such penalties?

By not making cartel agreements.

However, if you feel you may be guilty of a cartel offence but are willing to come clean about it, the Office of Fair Trading (OFT) may grant a ‘no-action letter’ which the Lord Advocate will take into account when deciding whether to prosecute.

How do I qualify for a ‘no-action letter’?

  • Admit participation in the criminal offence
  • Provide all information about the cartel’s activities
  • Maintain cooperation throughout the investigation
  • You must not have actively persuaded others to join the cartel
  • Cease all further participation in the cartel.

However, if the OFT believes it has enough evidence for a successful prosecution it will not issue a no-action letter to that individual.