Do Directors Have a Duty of Care in the UK?

As a director or shareholder of a company, you may have heard the phrase “duty of care.” While it is a common term concerning your duties as a director, it is not always clear what this duty entails. Even lawyers struggle to define the full extent of a company director’s duties. However, the law places a great deal of responsibility on directors, including a duty of care towards their company. Failure to meet these responsibilities can result in criminal and civil liability in certain circumstances. Likewise, you risk disqualification from being a director in the future. 

To help you understand your obligations, this article explores what a director’s duty of care means, to whom you owe this duty and an overview of other director duties.

What is a Duty of Care?

A “duty of care” generally refers to an obligation to take “reasonable care” to avoid causing someone else “damage”. 

For directors, a duty of care means you must exercise reasonable care, skill and diligence when performing your role as director. In addition, the law imposes a general duty on all directors to carry out their responsibilities with sufficient carefulness and competence. 

Directors owe a duty of care to the company itself and not, typically, the shareholders, creditors, or other company directors. 

How is Duty of Care Measured?

 As a director, you will be measured against two different standards:

First, there is an objective standard. Here, the law considers what any other reasonable director responsible for a company of a similar size and in similar circumstances of your company should do.

Likewise, there is a subjective standard. This is a higher standard and means that if you possess some particular knowledge, skill, or expertise, your conduct will be considered in light of it.

Ultimately, what constitutes a breach of a director’s duty of care to the company depends on your individual circumstances.

Also, it is not possible to delegate this duty. For instance, you may instruct an accountant to prepare your accounts, but you must exercise your power of supervision to ensure they are adequate. Likewise, suppose you are a director of a company but are not actively involved in managing the company (as some directors in family companies sometimes are). Here, you may be held liable for the actions of other directors. This is especially where there is fraud or other serious misconduct.

Do I Owe This Duty to Anyone Else?

In most circumstances, your duties as a director do not extend to anyone other than the company. There are two exceptions:

1. You may owe a duty to another shareholder if you have agreed to act as their “agent” or had, in your capacity as director, agreed to advise other shareholders on the value of their shares. Importantly, it is mainly relevant to small companies, particularly family companies; and
2. If your company is approaching insolvency (i.e. your company cannot pay its debts), you would owe your creditors a general duty of care.

Additionally, you will likely owe other duties of care separate from your duty of care as a director. At the most basic level, we all owe a general duty of care to those around us not to act in such a way that could cause them injury.  

Do I Owe This Duty to Anyone Else?

In addition to a general duty of care owed to your company, you also owe the following duties to:

• act within the powers given to you by your company’s articles of association; 
• promote the success of the company;
• avoid conflicts of interest;
• decline benefits from third parties; and
• declare interests in a proposed transaction with the company.

Consequences of Breaching My Duties?

There may be consequences for breaching your duties. However, it depends on which duty you breach and the fallout from the breach.

For example, if you:

• make any personal profit in the course of breaching the duty, a court can order you to repay the amount; 
• cause the company any loss in the course of breaching the duty, a court can order you to compensate the company;
• take company property, you can be ordered to return it; or
• plan to breach your duty, such as if you try to enter into competition against your company, the court can issue an injunction. An injunction is an order not to do something.

Additionally, while a court can issue penalties, you may also suffer consequences from the company. For example, the company end your service contract. 

The breach of your general duty of care, as opposed to other duties, usually means the court can hold you personally liable for any loss caused to the company.

 As a final note, you may be wondering who would bring this claim against you if the company cannot act for itself. The answer is that other directors would bring the claim in the company’s name. In rare circumstances, shareholders can bring a claim against a director on behalf of the company.

Key Takeaways

Directors owe a duty of care to their company. This simply means that when exercising your power as a director, you must act to the reasonable standard expected of a director working for a similar company in similar circumstances. If you have certain skills or expertise, a court will factor these when assessing the alleged breach of your duty of care. Outside of exceptional circumstances, this duty does not extend to shareholders.

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