Are you a company director?

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If so, know your duties!

As a company director, you have an immediate impact on the day to day management of the company including strategic and operational decision making – all of which is key to ensuring the company runs successfully. As part of the role you are subject to a raft of fundamental duties imposed on all directors of UK limited companies by the Companies Act 2006. It is important for all directors to understand these obligations, as a breach of the required duties could lead to personal liability and, in certain circumstances, result in potential director disqualification.

What does the Companies Act 2006 require of me?

As a director, you need to:

1. Act within your powers

This means only acting in accordance with the company’s constitution (to include the company’s articles of association, resolutions and constitutional agreements) and only exercising your powers for the purposes for which they were given.

2. Promote the success of the company

You must act in good faith for the benefit of the company’s members as a whole. This includes careful consideration of the relevant factors that may impact upon the success of the company, for example:

  • The likely consequences of any decision in the long term;
  • The interests of and impact on the company’s employees, suppliers, customers, the local community and the environment; and
  • The maintenance of the company’s reputation.

3. Exercise independent judgement

It is vital for directors to preserve their independence and make their own decisions without feeling obliged or influenced by any external factors.

4. Exercise reasonable care, skill and diligence

The test for the expected standard of ‘reasonableness’ is measured against both objective and subjective criteria in this instance. The general knowledge, skill and experience a director actually possesses will be considered against that which may reasonably be expected of another person carrying out the same function. This means that a director’s actual understanding and capabilities may not be sufficient if more could reasonably be expected of someone else in his or her position.

5. Avoid conflicts of interest

Directors must take steps to avoid a situation in which they have, or could have, an interest that conflicts, or could conflict, with the interests of the company. There are no simple rules that will determine which situations will or will not give rise to a conflict of interest. Therefore, directors must carefully consider the relevant circumstances on a case by case basis. The duty will not be infringed if the situation has been pre-authorised by a provision in the articles of association or by resolution at member or board level. If you think there may be a potential conflict situation you should seek approval before undertaking any further action.

6. Not accept benefits from third parties

There is a prohibition on the acceptance of any benefit from a third party given because you hold the office of director or because you do (or do not do) a particular action or function as a director.

7. Declare interests in proposed or existing transactions or arrangements with the company

This declaration must be made if you are in any way, directly or indirectly, interested in a transaction or arrangement with the company. The declaration must be made to the other directors and should detail the nature and extent of your interest. If it is a proposed transaction, you must do this before it is entered into; or, if an existing transaction, then you must do this as soon as possible.

You will not have breached the duty if your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict, or if you are unaware of your interest, or if the other directors are already aware of it. However, it would be sensible to adopt a cautious approach in this regard and to ensure full and adequate declarations are made wherever possible.

8. Other duties

The Companies Act 2006 imposes further obligations on directors, some of which are personal in nature and some of which arise from the responsibility of the directors to ensure that the company carries out its obligations, where both the company and the director may face liability in the event of failure.

Examples of these other duties include the preparation, content, circulation and filing of the company’s annual reports and accounts and the restrictions and conditions placed on transactions between a director and the company, including director’s loans.

In addition to the above, a director owes a duty of confidentiality to the company as well as a duty to comply with wider legislation concerning health and safety, anti-corruption, data protection and environmental matters.

Who do I owe my duties to?

Your duties are owed to the company itself and not to other directors or individual shareholders.

It is common for a director to also be a shareholder or an employee of the company (or both), which means that he or she will be subject to additional rights and duties going beyond those connected with their office as director. If this is the case for you, it is vital to know the difference between these separate roles and understand when is the appropriate time to wear each of your different ‘hats’.

What are the consequences if I breach my duties?

Only the company itself (or in limited circumstances, the shareholders) will be able to enforce the general duties noted above. Remedies available to the company for breach of a director’s required duties include:

  • Injunctions (to prevent further breach);
  • Setting aside an effective transaction (for example, entered into by the director in breach of the conflict requirements);
  • Restoration of company property held by the director; and
  • Damages.

A breach may also be grounds for termination of a director’s service contract and, in certain circumstances, a director may be disqualified from being a director under the Company Directors Disqualification Act 1986.

For further information about the duties and responsibilities of a company director or to speak to a member of our team in relation to company law or corporate governance, please contact Hunt & Coombs’ Company Commercial team on 01733 882800 or email [email protected].

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