What are a NED's Legal Responsibilities?
NEDs have exactly the same status under the law as, and share unlimited liability with, their fellow Executive Directors. These responsibilities and duties are defined in the Companies Act 2006.
DIRECTORS’ DUTIES UNDER THE COMPANIES ACT 2006
There are seven general duties for Directors, set out in Sections 170-177 of the Act, as follows:
1. Duty to Act within their Powers (Section 171)
All Directors are under a duty to act in accordance with the company’s constitution (i.e. its Articles and Memorandum) and observe any restrictions contained therein. In addition, any powers delegated to a Director by shareholders must be used for the benefit of the company.
2. Duty to Promote the Success of the Company (Section 172)
This is one of the most significant changes brought about by the Act in terms of a Director’s duties. It is now the duty of a Director to act in a way that he or she considers, in good faith, would be most likely to promote the success of the company and consequently for the benefit of its members as a whole.
Whilst “success” is not defined in the Act, Directors should consider a number of factors, including the following (non-exhaustive) list:
3. Duty to Exercise Independent Judgment (Section 173)
Although Directors will still be able to consult experts on various matters, the responsibility for decisions taken by them rest with the Directors collectively and they must exercise their own judgment in deciding whether to follow the advice of a third party.
4. Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)
This section identifies the standard of competence which Directors are expected to meet in the course of carrying out their functions. As a minimum, and assessed objectively, Directors must display the knowledge, skill and experience that may be reasonably expected of a person carrying out the functions of the Director in relation to the company. The care, skill and diligence exercised by a Director will also be assessed subjectively in terms of the general knowledge, skill and experience that the Director actually has.
5. Duty to Avoid Conflicts of Interest (Section 175)
A Director must actively avoid situations in which he or she has, or could have, an interest (whether direct or indirect) that conflicts, or may conflict, with the interests of the company. For private companies (formed on or after 1 October 2008), the Act does, however, allow an independent quorum of Directors to authorise such conflicts as long as the company’s constitution does not expressly prevent them from doing so.
6. Duty Not to Accept Benefits from Third Parties (Section 176)
A Director should not make a secret profit as a result of being a Director. The Act states that a Director is not permitted to accept a benefit from a third party by reason of (i) being a Director; or (ii) as a consequence of taking (or otherwise) a particular action as a Director.
7. Duty to Declare Interests in a Proposed or Existing Transaction or Arrangement with the Company (Section 177)
Other duties that a Director should consider, whilst not exhaustive, may include:
LIABILITIES OF NON-EXECUTIVE DIRECTORS
The basis of corporate limited liability is that all debts incurred by a company are the company’s liabilities and not directly the legal liabilities of the shareholders or of the Directors.
Under UK law, a company is a separate legal person from the shareholders and the Directors, including the NEDs. A company normally incurs debts in the course of its business and therefore, as a discrete legal entity, only the company is liable for such debts.
The UK Government offers Advice on running a limited liability company.
In order to benefit from the protection afforded by limited liability company status, NEDs must ensure that they act properly and responsibly. The law requires all Directors to act in this manner.