Skip to main content

Overview Of Directors’ Duties

This guide is about Directors’ duties.

In this article you’ll learn about:

  • Directors’ duties under the Companies Act 2006.
  • Directors’ fiduciary duty.
  • Duty for the company’s assets.
  • Duty in respect of keeping proper books and records.
  • The burden of proof on Director transactions through their loan account.
  • Need to avoid relinquishing control of a company.
Directors’ Duties

What are the Companies Act 2006 Directors’ Duties?

The Companies Act 2006 codified various Companies Act Directors’ Duties that had been set out in case law as follows:

  • duty to act within powers,
  • duty to promote the success of the company,
  • duty to exercise independent judgment,
  • duty to exercise reasonable care, skill and diligence,
  • duty to avoid conflicts of interest,
  • duty not to accept benefits from third parties
  • duty to declare interest in a proposed transaction or arrangement.

Directors’ Duties Involves Fiduciary Duties

Director’s duties incorporate a fundamental duty of loyalty and to act in the best interests of the company, in good faith.

There is an overriding duty not to secretly profit from the directorship.

Acceptance of the appointment of the office of Director is not to be undertaken lightly, particularly if there is no intention to engage in the management of the company’s affairs.

Directors’ Duties For The Company’s Assets

Directors’ Duties involve the need to safeguard the company’s property and not to permit their personal interests to conflict with those of the company.

Consider paragraphs [148] and [149] of GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 (“Maroo”), as follows:

[148]  This passage confirms that a “trustee must show what he has done with that [ie trust] property”. It is less obvious that it provides authority for the proposition that the “principle applies to company directors as it does to trustees”, but support for that view is, to my mind, to be found elsewhere. For example, in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 4 All ER 335, [2011] 3 WLR 1153, Lord Neuberger MR (with whom Richards and Hughes LJJ agreed) said (in para 34):

Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: per Nourse LJ in In re Duckwari plc (No 2) [1999] Ch 253, 262. Similarly a person entrusted with another person’s money for a specific purpose has fiduciary duties to the other person in respect of the use to which those moneys are put.

The close analogy between directors and trustees suggests, to my mind, that, much as a trustee “must show what he has done with [trust] property”, it is incumbent on a director to explain what has become of company property in his hands.

[149]  In the circumstances, I agree with Mr Miles that, once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director’s loan account, it must be incumbent on the director to justify credit entries on the account. That conclusion makes the more sense when it is remembered that the director (a) will have been (one of those) responsible for the management of the company’s business and (b) will have had a responsibility for ensuring that proper accounting records were kept (see eg ss 386 – 389 of the Companies Act 2006).

Directors’ Duties For Books and Records

Directors’ Duties involve the mandatory duty to maintain proper books and records so that the financial position of the company can be assessed on a timely basis.

The requirement is set out in the Companies Act 2006 and Directors need to be aware that when they sign a company’s balance sheet for the annual statutory accounts, they declare that they have complied with this duty.

It is the responsibility first and foremost of the Directors to ensure that they have complied with such a duty, not that of any agent, accountant or other financial advisor they may have instructed or sought to delegate such responsibilities.

Directors who do not live up their Directors’ Duties do so at their peril as was arguably demonstrated in Re Mumtaz Properties Limited [2011] WCA Civ 610 (“Mumtaz”) at paragraphs [14],  [17], and [11]:

[14]  In my judgment, contemporaneous written documentation is of the very greatest importance in assessing credibility. Moreover, it can be significant not only where it is present and the oral evidence can then be checked against it. It can also be significant if written documentation is absent. For instance, if the judge is satisfied that certain contemporaneous documentation is likely to have existed were the oral evidence correct, and that the party adducing oral evidence is responsible for its non-production, then the documentation may be conspicuous by its absence and the judge may be able to draw inferences from its absence.

[17] “…persons who have conducted the affairs of limited companies with a high degree of informality, as in this case, cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available.”

[11]  By the end of the judgment, it is clear that what has impressed the judge most in his task of fact-finding was the absence, rather than the presence, of contemporary documentation or other independent oral evidence to confirm the oral evidence of the Respondents to the proceedings.

Burden of Proof For Directors

Ordinarily, a litigant bears the burden of proving its case. Indeed the usual rule is that the party responding to a claim should be left in no doubt as to what the case is that they have to meet. That is a position footed on fairness in litigation.

In a Liquidation when a Liquidator brings proceedings against a Director for compensation in relation to transactions complained about, the usual position will be that it is anticipated the Liquidator will have obtained the requisite evidence necessary from documents and other information coming into the Liquidator’s hands, to prove the case so that he or she can anticipate that the Court will grant the relief sought in the application. This is typically considered to be a positively pleaded case because the information is available. Directors do have specific Duties to a liquidator.

However, a Liquidator enters office as a stranger and if the Directors do not properly cooperate and or have failed to create, maintain or retain proper records of the company’s transactions and dealings, then perhaps inevitably a Liquidator might be hampered in seeking to understand its affairs. The same will apply in an Administration.

In such an instance if it can reasonably be shown that transactions have taken place whereby money or property has been transferred from the company to the Directors but there is no contemporaneous record available to show the purpose of such transactions, then Directors can hardly be surprised (given the obligation to keep proper records) that the burden is with them to show that such transactions were proper.

This is what typically might be considered to be a negatively pleaded case ie. the absence of information is the Liquidator’s evidence in effect for it.

If because of poor, bad or non-existent record keeping the Directors are unable to show that transactions from which they appear to have personally benefited were proper, then it appears to have been held in the matter of Toone v Robbins [2018] EWHC 569 (Ch) that the burden of proof shifts from the Liquidator to the Director:

Directors who receive money from the company cannot be heard to say: –

“We have received company money: but our record keeping is so bad that the basis upon which we received it is unclear. So by reason of our defaults we ask you to assume in our favour that we took the money lawfully”.

Director Delegation Considerations

Suggestions of acting as a Director in name only are unlikely to enable a Director to avoid the burden of the responsibility.

It is important a Director applies their mind to the task and ensures that even if they delegate authority to others for the financial operations of the company they keep themselves appraised as to its position otherwise they could be accused of Director abdication of responsibility.

This was pointed out notably Madoff Securities Limited v Raven [2013] EWHC 3147 (Comm):

It is legitimate, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company. Nevertheless each individual director owes inescapable personal responsibilities. He owes duties to the company to inform himself of the company’s affairs and join with his fellow directors in supervising them. It is therefore a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where such involves a total abrogation of this responsibility.

A failure by a Director to observe such duties may result in a breach of duty potentially having wide ranging ramifications, including but not limited to Director disqualification.

It is the duty of any Director to avoid a situation where they relinquish control of a company to another Director. You can delegate if you so wish but you cannot relinquish full power and then say “sorry chaps or chapesses it is not my fault” if something goes horribly wrong later on and say for example only, a Liquidator has to pick up the pieces, especially where you have a Director who might not be transparent.

A Director has an absolute duty to seek out the financial information otherwise consider the following question: what is the point in being a Director in the first place. Why not resign? What is the point of having all the risks of being a Director if you do not insist upon doing one of the most important roles of a Director ie. to be able to make informed decisions about company financial affairs.

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: April 13, 2024

Please enable JavaScript in your browser to complete this form.

Name

100% Confidential Advice
We Know Insolvency Inside Out

Director Litigation

Share This Page!

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to Directors’ Duties then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

Please enable JavaScript in your browser to complete this form.
Name

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Opt in

Disclaimer: Directors’ Duties

This page is not legal advice and is not to be relied upon as such. This article Directors’ Duties is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

Recent Posts / View All Posts

Directors Are Entitled To Accounting Records At All Times

Directors Are Entitled To Accounting Records At All Times

| Director Duties | No Comments
Directors are entitled to accounting records at all times. That is what Section 388(1)(b) of the Companies Act 2006 says and to prove the point is the case of Suzui…
Limits Of Directors’ Powers To Grant Inter-Company Loans

Limits Of Directors’ Powers To Grant Inter-Company Loans

| Director Duties | No Comments
The limits of Directors’ powers to grant inter-company loans were highlighted in the case of Northern Powerhouse Developments Ltd & Ors v Woodhouse EWHC 3124 (Ch). This was a case…
Should Directors Be Required To Sit A Test To Form Their First Company

Should Directors Be Required To Sit A Test To Form Their First Company?

| Director Duties | No Comments
Should Directors Be Required To Sit A Test To Form Their First Company Overview Should Directors Be Required To Sit A Test To Form Their First Company? The answer is…
The Creditor Duty And Its Effect On An Overdrawn Director’s Loan Account

The Creditor Duty And Its Effect On An Overdrawn Director’s Loan Account

| Director Duties | No Comments
Overview Of The Creditor Duty And Its Effect On An Overdrawn Director’s Loan Account The matter of the Creditor Duty and its effect on an Overdrawn Director’s Loan Account highlights…