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Directors / Service Agreements

What are a director’s responsibilities?

The directors of a company are primarily responsible for:

  • determining the company’s strategy
  • managing progress towards achieving the company’s goals
  • ensuring proper financial management
  • appointing personnel
  • taking decisions in the best interests of the shareholders
  • ensuring compliance with the company’s legal obligations
  • producing reliable accounts

What are a director’s powers?

The directors exercise all the powers of the company and carry out its activities, subject to the Companies Act 2006 and the company’s memorandum and articles of association.

The memorandum and articles of association often include provisions and restrictions limiting the company’s actions and activities. The directors usually act collectively as a board to bind the company, but the articles may also entitle the board to delegate powers to individual directors as appropriate.

The Companies Act 2006 also imposes certain statutory duties and responsibilities in the management of the company. The 2006 Act codified and largely replaced the case law-based equitable duties of directors, often referred to as fiduciary duties. The previous case law remains relevant in interpreting these statutory duties. These duties are owed over and above a director’s ordinary employee obligations.

What are a director’s duties under the Companies Act?

The Companies Act 2006 sets out seven general director duties:

  • to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were given
  • to promote the success of the company for the benefit of its members (ie, shareholders)
  • to exercise independent judgement
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare an interest in a proposed transaction or arrangement

In addition to these statutory duties directors are subject to a range of regulations and legislation, including the Insolvency Act 1986, Health and Safety at Work legislation and the Company Directors’ Disqualification Act 1986.

Directors can face serious penalties if a company fails to carry out its statutory duties, although there may be a defence if there are reasonable grounds to believe that a competent person had been given the responsibility to ensure that statutory obligations were complied with.

What are the duties of a company secretary?

A company secretary is the main administrative officer in the company and is responsible for the performance of administrative duties imposed under the Companies Act 2006 and obligations in relation to filing information.

A private company is not required to appoint a company secretary, but if a company secretary is not appointed then the duties and responsibilities of the company secretary will be the responsibility of the directors.

Why is a director’s service agreement important?

One size cannot fit all companies and a service agreement allows a business to take steps to protect its particular interests. The agreement can identify contractual rights and obligations not found in the statutory duties, for example reporting to the Board, varying a director’s duties and responsibilities, or engaging in alternative business activities even if they do not give rise to a conflict of interest. Additionally a service agreement can impose obligations for the protection of the business and its goodwill, customers and staff in the form of a garden leave clause, detailed confidentiality obligations and enforceable post employment restrictions. If these are not expressed in a contractual agreement then the general law imposes either no obligation, or a very limited one.

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