The legal duties of a director whilst running a company include that they must act in its best interests. This includes making sure that the company complies with the law, providing leadership, setting strategy and ensuring that the company has sufficient financial resources. Directors must also exercise due diligence when making decisions on behalf of the company.
This means considering all relevant information and taking into account the risks involved. If a director breaches their duties, they may be liable to the company for damages. The extent of this liability will depend on the nature of the breach and whether it was reckless or fraudulent,
The Companies Act 2006 imposes certain general duties on a director of a UK limited company. Our guide provides directors with an overview of these fundamental duties.
What is my role as a director?
The role as a director has a wide range of responsibilities, from ensuring the financial health of the company to supervising employees and making strategic decisions. In many ways, a company director is like the CEO of a small business. They are responsible for overseeing all aspects of the company and making sure that it runs smoothly.
This can include everything from handling finances and HR to developing marketing campaigns and setting company goals. A company director must be able to wear many hats and be comfortable with change. They must also be able to delegate tasks and build a strong team of employees.
Ultimately, a company director is responsible for the success or failure of the company. This is a huge responsibility, but it can also be extremely rewarding.
What are my general duties under the Companies Act 2006?
As a director your general duties under the Companies Act 2006 are:
To act within the powers giving to you
The articles of association are a company’s constitution. They set out the rules by which it must be run and administered, including appointments for directors; their powers/responsibilities in general terms (e..g., RUNNING THE BUSINESS), procedures relating to board meetings or shareholder decisions such as elections etc..
Although it is a legal requirement that directors are familiar with the articles of association and follow all rules included in them, exceeding decision-making powers or not following procedures could lead to having decisions reversed. Directors may also have payouts refunded if they cause any financial losses for their companies
Promote the success of the company
Directors must make decisions in good faith, even if it means sacrificing short-term gains. Success generally means increased long term value but each director has a duty to decide what is best for the company as a whole and this will depend on their individual view of how likely they think any particular course of action would be successful promoting things like success rates or share prices over time – although remember that there needs ultimately always remain some balance between these two perspectives so you cannot just take one side completely
When considering how to promote the success of the company, the company legislation states that a director must have regard to:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company.
Where this list is not exhaustive but is designed to offer guidance and highlight areas of particular importance to responsible business behaviour.
Exercise independent judgment
Exercise the same care, skill and diligence that would be exercised by a reasonably diligent person in your position. There is no prevention on you from acting in accordance with the company’s constitution or an agreement which the company has entered into.
Exercise reasonable care, skill and diligence
Company directors are held to a higher standard than ever before. They must exercise reasonable care, skill and diligence in every aspect of their role as well as having competence for what they do at meetings with shareholders or other board members–it’s not just enough that you know your name on the door anymore!
You will need to exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
- the general knowledge, skill and experience that you possess personally.
However, the director’s actual understanding and abilities may not be enough if more could reasonably expected of someone in his or her position.
Avoid conflicts of interest (a conflict situation)
In order to avoid any conflict or potential for one, it is important that you do not have a conflicting interest and still represent the best interests of your company. This includes avoiding situations where there could be exploitation from information as well opportunities which may arise due in part by how much access an individual has with regard to exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
The duty is not infringed if:
- There is no conflict of interest here because you are not in a position to pose any threat or harm towards the company.
- The situation has been pre-authorised. The articles of association will allow authorisation, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.
There are no hard and fast rules when it comes to determining whether or not there is a conflict of interest. However, the following situations may potentially give rise such conflicts:
A situation where one person’s interests could compete with another individual’s (for example business partner versus investor); A professional who provides services on an advisory basis; An employee working for two different companies that have overlapping clientele bases but compete directly against each other in providing those same goods/services.
An example is: if I am both salesperson AND accountant at my job then clearly what you’re saying here would go straight into how much time we spend together because now this information has been given by me as well so let us say something about.
A direct conflict of interest can exist where a company director:
- Has business or personal relationships with individuals who could be affected by the activities of the company.
- Acts as the director or has shares in another company that could be affected by the activities of the company.
- Holds an advisory position in a firm that competes with the company.
- Takes advantage of property, information or opportunities belonging to the company for their personal gain.
The failure to avoid or disclose any direct or indirect interest the director has in company transactions or arrangements could lead to criminal action.
If you think you may be placed in a potential conflict situation you should:
Seek approval – The board can authorise conflicts if it has the power to do so. The shareholders will be able approve or reject a situation where there is potential for one, depending on their preference in management styles and how much control they want retained over company decisions overall!
Check the articles of association – the company’s memorandum and articles might contain provisions relating to conflicts of interest, including:
pre-authorised common conflict situations – These could just be a few examples of the many situations where you might find yourself in conflict without approval. Cross-directorships and positions relating to company pension schemes are two typical ones, but there’s no limited list!
conduct provisions – You should always read and follow the instructions on this kind of conflict notice. It could contain information about how you’re expected to behave in relation an authorised conflict, as well as confirming that if your actions are informed by it then there won’t be any breaches of other duties towards Company.
These typically deal with:
- protecting the confidential information of the company and the third party
- inclusion or exclusion from board meetings and receipt of board papers
- any benefit received as a result of the authorised conflict.
Regulate your behaviour – It is important to remember that regardless of whether or not a potential conflict situation has been authorised by the articles and traditions in your company, you should still act appropriately. You must take care so as not only do what’s right but also promote success for all involved parties; this includes following any terms attached with authorisation too!
Not accept benefits from third parties
If you accept benefits from third parties while acting as a director, it can be seen that your judgment may not always be independent.
It is important to remember the duty of impartiality which prevents anyone involved in company decisions from having interest outside their professional career or employment.
These includes accepting gifts before signing up with any business association/association memberships etc., especially if these things could create conflicts between personal interests and those wishing for success within an organisation where they work.
Declare interests in proposed or existing transactions or arrangements with the company
If you are in any way, directly or indirectly interested in a transaction with the company then it is your responsibility to let us know. You can do this before anything goes forward but if an arrangement has already been proposed we recommend that you speak up as soon as possible so there isn’t time for other parties involved who may have different ideas about how things should be done.
Lack of transparency will only lead towards problems later on down road.
This duty is not infringed if:
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest
- an interest has not been declared because you are unaware that you have the interest or the other directors are already (or ought reasonably to be) aware of it.
Who do I owe my general duties to?
The director’s duties are owed to the company, not other group companies or individual shareholders. It is this one that can take enforcement action against you if there has been a breach in these standards set out by law for directorships across all industries worldwide.
Though most cases will see them dealt with at either stage by their board deciding whether they want waste time on something minor when significant breaches occur (such as starting proceedings), but also what happens if someone goes bankrupt where liquidation occurs instead; The decision making process would happen here first before moving onto anything else relating specifically towards insolvency situations which might arise during warned times.
The company’s shareholders can bring a claim against the director for breach of duty on behalf not just themselves, but also all other parties that have been negatively impacted by their actions.
What penalties are there if I breach my general duties?
The risk of being charged with criminal negligence for failing to disclose an interest in a transaction or arrangement with the company is very real.
If you’re found guilty, not only will your career come screeching down but so too could any chance at happiness that may have once existed for this unfortunate soul!
Is there any form of relief for a breach of the general duties?
Should a director finds themselves that has acted in a way which breaches the general duties that are required and owed to the company the following help may be available:
- in certain circumstances the breach may be ratified by resolution of the company’s shareholders
- in certain circumstances the court may grant relief if the director acted honestly and reasonably
- the company may have arranged insurance for the benefit of its directors
- the company may wish to offer assist the director by indemnifying him or her against costs incurred if they successfully defend a claim brought against them for breach of duties.
Do I have any other responsibilities under the Companies Act 2006?
Responsibilities under the Companies Act 1986 for a director will require a number of different obligations to your company and its shareholders. Some are personal in nature while others arise from the responsibility of ensuring that both directors as well as companies themselves fulfill their legal duties (and can face liability if they don’t). Penalties for a breach of an obligation can include fines or imprisonment, depending on the severity.
The directors are responsible for preparing, contenting and filing the company’s annual accounts and reports. They must also ensure that all of its other obligations fall directly on them as well.
The duties of a director are extensive and span many areas. One big obligation is ensuring that they do not conflict with any restrictions or conditions placed on transactions between themselves, their company – including loans given to directors by the firm as well-and third parties such those banks which offer mortgages in respect thereof; another important task falls under what’s referred here called “directorial responsibilities.”
What about other duties and obligations?
You must also comply with a number of other obligations that are not covered by the main legislation.
Some examples are:
- Although it is difficult to define what information should be considered as “company confidential,” a director who has access or responsibility for such material must never disclose its contents unless specifically directed by the company.
- Directors are responsible for ensuring that the company complies with its obligations relating to workers’ health, safety and welfare. They must do this under current law or they could face fines up £100k per incident!
- Obligations that similarly arise under environmental legislation and anti-corruption legislation.
What are my responsibilities on insolvency?
When a company is in financial difficulty, the directors should seek independent advice as soon possible to avoid potential personal liability under insolvency legislation.
There are many risks for directors in this area, including the risk of being disqualified from holding their position or involved with promotion and management at companies for up 15 years.
Some key issues for director of a company which is insolvent or approaching insolvency are:
- modification of the general duty to promote the success of the company – the general duty are modified at this point if a company is (or is on the verge of being) insolvent, therefore a director must now act in the best interests of the company’s creditors.
- wrongful trading – a director can be ordered by the court if found guilt of wrongful trading and made to contribute towards the general pool of assets which are available to a company’s creditors where he or she:
- knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration
- continues to allow the company to trade on after he or she knew or ought to have so concluded
- does not take every step to minimise the potential loss to creditors.
It is important to be honest and clear about any potential difficulties when you join a company. You should never try to hide the truth from your fellow directors, even if it means losing their trust in order for reputations not get damaged later on down the line,
A director does not need dishonestly trying avoid responsibility by resigning; he or she can still face legal action even after leaving office – so staying onboard makes sense!
This area for directors can be difficult to navigate and fit and proper advice should always be sought.
Fraudulent trading – The director who engages in fraudulent activity to secure funds or property from a company faces serious criminal charges. The act requires intention, but if found guilty they could be required to contribute assets available for distribution as well as face legal proceedings. A person acts with intent when there’s knowledge that one is participating within an action which has been established by law.
Misfeasance – There are many ways a director can be guilty of this. They might have misapplied or retained company assets, wrongly exercised authority and so on – but it doesn’t necessarily involve moral blame! If the court finds that you’re in breach then they’ll order repayment together with any available money from those who’ve been creditors before anything else happens (such as being distributed).
Can the company indemnify or insure me against claims?
The company may well defend you in court (but is not obliged to) if necessary, but they are not required to pay for any damages incurred.
Indemnity insurance can potentially cover both the cost of the claim itself and the costs involved in defending it but never the following:
- the unsuccessful defence of or fines imposed in criminal proceedings
- penalties and fines imposed by regulatory bodies.
The cost of directors’ and officers’ (D&O) insurance can be substantial. If a company is assuming the risk, then they need to make sure that their liability coverage will meet any potential costs should something go wrong. The importance here lies not only with what type but also how much money you are using as protection for yourself should anything happen while acting within these shores!
The directors should ensure they understand any limitations on cover and that insurance policies are kept under regular review. The Standard policy exclusions include fraud, dishonesty or criminal behaviour but it’s important to be aware of what yours actually covers before signing anything.
Directors have a number of legal duties and responsibilities whiles running a company. Failure to adhere by these be that a breach of directors’ duties has accrued. If a director of a company breaches his or her fiduciary duties, they could face civil action and, in some cases, criminal sanction. Breach of directors’ duties and resulting legal action can have significant consequences for the director, company, shareholders and creditors.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.