Narmeen Shahid

 This paper provides an overview of directors’ and officers’ duties and liabilities. For individuals that are acting as directors, or contemplating acting as directors of corporations, understanding these duties and liabilities is good governance and helps to protect against liability, both for the corporation and personally1. Management and board of directors use judgment to determine how much control is enough. Day-to-day management of a company is delegated to the directors by its shareholders. Directors, being the principal management organ of the company must act for its benefit and the courts have long held that they occupy a fiduciary position. The classic statement on the position of directors was given by Lord Cranworth in Aberdeen Rly Co v Blakie (1854). Directors are initially appointed by the shareholders and can usually themselves appoint additional directors up to any limit set by the articles of association. Directors owe a duty to the company and, if insolvency threatens, to creditors. Certain key duties of directors have been placed on a statutory footing under the Companies Act 2006 (the "Act"). These duties are owed to the company2. GENERAL DUTIES: A director's general duties are owed to the company and not to individual shareholders. The Act codifies certain key duties3, as follows: 1. Duty to act within powers (section 171) 2. Duty to promote the success of the company (section 172) 3. Duty to exercise independent judgment (section 173) 4. Duty to exercise reasonable care, skill and diligence (section 174) 5. Duty to avoid conflicts of interest (section 175) 6. Duty not to accept benefits from third parties (section 176) 7. Duty to declare interest in proposed transaction or arrangement (sections 177 to 185) CONSEQUENCES OF BREACH: The general duties outlined above are owed by the director to the company and only the company (or in limited circumstances, the shareholders) will be able to enforce them as such. Remedies available for breach of these duties include injunctions (to prevent further breach), setting aside an affected transaction (eg entered into in breach of requirements on conflict), restoration of company property held by the director and damages. DIRECTORS’ LIABILITY: A director of a company cannot be exempted from liability (regulation 52) in connection with any negligence, default, breach of duty or breach of trust in relation to the company. A director cannot, indemnified by the company against those liabilities (regulation 53-54) unless the indemnity meets specific statutory criteria4. CONCLUSION: The new Act has effectively increased the duties of directors and extensively extended accountability for their action. It is therefore of the utmost importance that directors, senior managers and shareholders fully acquaint themselves with all the provisions of the new Act and the King report III. As important is that they review existing policies and ensure their compliance. The provisions are extensive and quite voluminous and it is therefore, advisable that you consult with your attorney to ensure that you are fully aware of all the ramifications and that your company’s internal processes and procedures are in line with this new legislation5.