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Directors: absolute power vs duty

Abraham Lincoln once said “to test a man’s character, give him power”. In our modern day business world this is a test administered to each company directors.

It seems like a statement of the obvious and indeed, it is but this is the gist of section 171 of the Companies Act. The act’s key point (which is often forgotten) is that a director’s power is not unlimited.

A director must act within the company’s constitution and only exercise powers for the purposes conferred. They have a duty and cannot require the company to carry out activities outwith the company’s constitution.

Consideration for directors

  • Do the company’s articles of association restrict the company’s activities?
  • Is there are a shareholders agreement which restricts what the company can do?
  • Does statute or case law prevent you from taking any particular action?

Directors must use their powers for the purposes they have been conferred. What this means will depend on the circumstances. If a court believes that the primary purpose behind an action of a director was improper, the court may reverse the decision / action of the director.

Consideration for shareholders

It’s important for shareholders to consider whether the current constitution provides sufficient protection for them.

Directors must remember that when you become a director, you are not only being awarded a title. You are taking on powers, obligations and responsibilities. Being a director is a duty and one that must be carried out conscientiously with regard for obligations and responsiblities.

If you are a director or shareholder and have any questions regarding directors’ duties or responsibilities, please speak to our experienced corporate team on 01383 721 621.

Steven Wicks on saw@businesslaw.co.uk, Angus McGuire on alm@businesslaw.co.uk or Alan D Stalker WS ads@businesslaw.co.uk.

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