Directors' duties in the United Kingdom

Directors' duties in the United Kingdom bind anybody who is formally appointed to the board of directors of a UK company.

Directors appointed to the board form the central authority in UK companies. In carrying out their functions, directors (whether formally appointed, de facto, or "shadow directors") owe a series of duties to the company. There are presently seven key duties codified under the Companies Act 2006 sections 171 to 177, which reflect the common law and equitable principles.

These may not be limited, waived or contracted out of, but companies may buy insurance to cover directors for costs in the event of breach. The remedies for breaches of duty were not codified, but follow common law and equity, and include compensation for losses, restitution of illegitimate gains and specific performance or injunctions.

The first director's duty under section 171 is to follow the company's constitution, but also only exercise powers for the "proper purpose" relating to the power. Prior proper purpose cases often involved directors plundering the company's assets for personal enrichment, or attempting to install mechanisms to frustrate attempted takeovers by outside bidders, such as a poison pill. Such practices are improper, because they go beyond the reason for which directors were delegated their power.

The all-important duty of care is found in section 174. Directors must display the care, skill and competence that is reasonable for somebody carrying out the functions of the office, and if a director has any special qualifications an even higher standard will be expected. However, under section 1157 courts may, if directors are negligent but found to be honest and ought to be excused, relieve directors from paying compensation. The "objective plus subjective" standard was first introduced in the wrongful trading provision from the Insolvency Act 1986, and applied in Re D'Jan of London Ltd. The liquidator sought to recover compensation from Mr D'Jan, who failing to read an insurance policy form, did not disclose he was previously the director of an insolvent company. The policy was void when the company's warehouse burnt down. Hoffmann LJ held Mr D'Jan's failure was negligent, but exercised discretion to relieve liability on the ground that he owned almost all of his small business and had only put his own money at risk. The courts emphasise that they will not judge business decisions unfavourably with the benefit of hindsight, however simple procedural failures of judgment will be vulnerable. Cases under the Company Director Disqualification Act 1986, such as Re Barings plc (No 5) show that directors will also be liable for failing to adequately supervise employees or have effective risk management systems, as where the London directors ignored a warning report about the currency exchange business in Singapore, where a rogue trader caused losses so massive that it brought the whole bank into insolvency.

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