If you’ve set up a limited company, you will be taking on new responsibilities as a director. Running the day-to-day business is up to you, but as a company director, you’re also legally obligated to perform certain duties and act in a certain way. The Act is designed to ensure all directors exercise their powers appropriately, upholding the values of the company and promoting its success. In this guide, we explore all the legal responsibilities of a limited company director.
What is the director’s role in a limited company?
Any limited company is owned by shareholders and run by directors. Shareholders appoint these directors (each company must, by law, have at least one), trusting them to manage the business. This includes making strategic decisions, overseeing the wellbeing of employees, and ensuring the company complies with all its statutory obligations (legal and financial). Management duties range from maintaining and filing accounts to monitoring finances and handling shares.
What are the legal duties of a company director?
Companies depend on directors for their expertise and judgement. You hold a lot of responsibility and significant decision-making power. To help ensure all company directors understand this responsibility, and carry their tasks out with integrity, honesty and accountability, the UK government outlined a set of seven director’s duties in the Companies Act 2006.
1. Duty to act within powers
All directors are expected to have a good working knowledge of the company’s constitution. This is the legal document the company put together when it was set up and registered. In particular, you need to follow the articles of association, which sets out rules for the board of directors and their decision-making powers. You’re obligated to exercise these powers appropriately. If you ever exceed these powers, your decision can be reversed – and you might even need to compensate the company for any related financial losses incurred.
2. Duty to promote the success of the company
Directors are expected to act in a way that is most likely to promote the success of the company. In short, any action you take should benefit members of the company as a whole.
When making any decisions, you need to consider the short and long-term impact on shareholders, employees, suppliers, customers, clients and communities. You also need to consider any potential impact on the environment and the company’s reputation.
This duty seems obvious, but it can be easy to get wrong. Directors might, for instance, prioritise the interests of certain shareholders or executives above those of everyone else. It’s key to remain unbiased and broad minded.
3. Duty to exercise independent judgment
Although you need to follow the rules and align to company values, this doesn’t mean you can’t have your own view. In fact, you’re expected to. Directors are required to exercise independent judgement. This means that rather than blindly following the commands of others, or relying on someone else’s knowledge and judgment, you need to develop and voice your own informed view on the company’s activities. Becoming very familiar with all the key aspects of a company’s activities helps you do this. When making a decision, consider the interests of the company and believe in your intuition.
4. Duty to exercise reasonable care, skill and diligence
Gone are the days when board members were chosen just for their name or reputation and never had to do any work. Today, directors are expected to act with a certain level of care, skill and diligence. How much skill exactly? There’s no strict criteria per se. However, you’re expected to have the same levels that a reasonably diligent person would have, or the levels that a company can fairly expect of a director. It’s a highly subjective area, so aim to err on the side of caution.
5. Duty to avoid conflicts of interest
A conflict of interest can happen either when:
- You’re involved in something that pulls your attention or loyalty away from your role as director (i.e. when serving one interest involves working against the other). This could include taking a stake in another company that competes with yours, or promoting an employee purely because you have a personal relationship with them.
- You take advantage of your position to gain personally from an activity or decision. This can include hidden perks, gifts from suppliers or the misappropriation of company assets.
As a director of a company, you need to avoid both these situations, especially those related to property, information or opportunity.
If something comes up that you think could be a conflict of interest, disclose it to your fellow board members or shareholders immediately. They’ll decide how to manage or approve the conflict. You can also check the articles of association, which outline provisions relating to conflicts of interest. If the activity is authorised by the company, you may be able to go ahead, as long as it doesn’t impact your other obligations.
6. Duty not to accept benefits from third parties
Accepting gifts or benefits from third parties, such as a supplier, can be a conflict of interest – especially if the gift is a bribe. These gifts are considered a threat to your objectivity, since you could award business to the supplier who offered you a weekend getaway.
This isn’t to say you can’t ever accept a gift. If the company decides the gift isn’t a conflict of interest, you can happily accept it. For example, the company might authorize a year-end gift from a regular supplier, thanking you for your business. Again, always disclose any situation with your fellow directors to ensure you’re acting lawfully.
7. Duty to declare interest in proposed transaction or arrangement
This is another type of conflict of interest. If, either directly or indirectly, you’re in any way interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors.
Your company, for example, might be recruiting or using the services of someone you’re related to. If they are, you must disclose this information as soon as you’re aware of the interest. This is to prevent it looking as if you influenced the decision.
If it’s a new transaction, disclose your interest before the company enters into the transaction. If it’s existing, do it as soon as possible.
What happens if I don’t uphold director’s duties?
Being a director is a serious and complex business – and the Companies Act 2006 is legally binding. This means that if you fail to uphold your duties, you risk facing legal action and criminal fines. If neglecting your duties also causes the company to lose money, you’ll be responsible for covering the costs of compensation.
The company, employees, vendors, competitors, investors and customers can all sue you for misconduct and negligence. It does happen, and is the reason Directors’ and Officers’ insurance exists. This insurance covers the costs of your legal defense and compensation claims in resolving the dispute. You won’t be covered for intentionally fraudulent or criminal conduct, however.
What is a director’s responsibility during insolvency?
If a company becomes insolvent, the rules change. As a director, it’s very important that you understand how liquidation impacts your responsibilities.
During insolvency, you no longer report to the shareholders or members. You now report to the creditors and are responsible for prioritising their interests.
The first thing you need to do is ensure the company stops trading immediately. If you continue trading, you may be held personally responsible for any debts accrued during that period. You also risk being found guilty of wrongful trading, which can lead to disqualification.
It’s also important that you don’t assume any of the assets or company money belong to you personally. Even if you helped fund the business with your own money, this money belongs to the company. If the company goes into a formal insolvency process, you could be classed as a creditor and receive some of it back – but this isn’t guaranteed.
Before taking any steps, it’s worth seeking professional advice from an accountant who specializes in corporate recovery and insolvency. They’ll help you ensure you’re acting in the interest of the creditors, with no risk to you.