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The legal implications of being a director

28 August 2014

Whether you've set up your own company, joined the board of a charitable organisation or climbed the ranks to become a director, there are certain legal implications that your role brings with it.

These "directors duties" are wide ranging but there are seven key duties which directors must comply with at all times. These include:

1. Acting within your powers

These "powers" will typically be set out in the companys articles of association. A copy should be requested from the company or obtained from Companies House and directors should familiarise themselves with the contents.

2. Promoting the success of the company

A director must act in a way that he or she considers would be most likely to promote the success of the company for the benefit of its members (or shareholders) as a whole. When making decisions directors should consider (amongst other things):

a. the likely consequences of that decision in the long term;

b. the interests of the companys employees;

c. the need to foster business relationships;

d. the impact of the companys operations on the community and the environment;

e. the desirability of the company maintaining a reputation for high standards of business conduct; and

f. the need to act fairly between the members of the company.

3. Exercising independent judgment

A director must exercise their powers independently. Directors can still rely on advice, as long as they exercise their own judgment in deciding whether or not to follow that advice.

4. Exercising reasonable care, skill and diligence

As a minimum, a director must display the knowledge, skill and experience that may reasonably be expected of a person carrying out their functions. If a director has specialist knowledge, a higher standard will be applied.

5. Avoiding conflicts of interest

This applies to direct and indirect interests and to the exploitation of property, information or opportunity, and will continue to apply after a person ceases to be a director in respect of the exploitation of any property, information or opportunity of which they became aware when they were a director. A conflict can be authorised by directors who are genuinely independent.

6. Not accepting benefits from third parties

A director must not exploit their position for personal benefit.

The members of a company can authorise the acceptance of benefits that would otherwise be a breach of this duty, and the companys articles of association may contain provisions dealing with this.

7. Declaring an interest in a proposed transaction or arrangement

A director must declare to the other directors the nature and extent of any interest (direct or indirect) in any proposed transaction or arrangement with the company, regardless of whether they a party to the transaction or arrangement.

In addition to these core duties, directors have many more responsibilities under a wide variety of laws and regulations, such as insolvency and health and safety legislation. There are also important, enhanced employment duties which go further than the duties of employees. For example, an employee has a duty to act honestly. A statutory director has the same basic duty, but in some cases it can go much further and may require the director to actually disclose his own wrong doing (which is known as a "fiduciary" duty).

It is also worth considering what contractual provisions may need to be put in place to protect a business when appointing directors. No doubt directors will have access to highly sensitive and confidential information, which could be devastating if it fell into the wrong hands. Setting out clearly what you consider to be confidential is very important should a dispute arise. Furthermore, it is common for directors to be subject to restrictions on what they can do when they have left the business. In order to make sure any restrictions are enforceable, they should be limited to a reasonable geographical area where the business actually trades, and limit solicitation provisions to customers the director actually had dealings with and staff the director had responsibility for.

Tina Robinson, corporate associate and James Tait, employment partner at law firm Browne Jacobson LLP

This article was first published in Real Business

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