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Understanding Directors’ Duties

The Companies Act 2006 imposes certain general duties on a director of a UK limited company. Here is an overview of these fundamental duties.

Directors are appointed to be in charge of managing or running a company on a day to day basis.  They hold ultimate responsibility for how a company operates and can be held accountable for the way that they manage the affairs of a company.

It’s common, particularly in small and medium size businesses, for directors also to be shareholders of a company but it is not a requirement that the shareholders are to also be directors, or vice versa. The role of a director is very different to that of a shareholder and much more involved on a day to day basis.

It is important to reiterate that a company is its own legal entity i.e. its own separate legal personality. This principle is fundamental when understanding the difference between shareholders and directors and in particular, the role of a director within a company.

To manage and develop a company, a director must possess significant power in order to allow them to make all the necessary decisions involved.  However, while a director has power to make these decisions, he or she also owes a duty of care to the company itself.  It is also worth noting that a director’s actions can be further limited by the articles of association of any given company and potentially also by shareholders agreements in place (if any).

What are my main duties as a Director?

The main directors’ duties, as set out in the Companies Act 2006, are:

  • to act in accordance with the company’s articles and to only exercise powers for the purposes for which they were given
  • to act in a manner that is most likely to promote the success of the company for the benefit of its shareholders;
  • to exercise reasonable care, skill and diligence when carrying out duties;
  • to exercise independent judgment;
  • to avoid situations where there could be a direct or indirect conflict of interest;
  • to refuse benefits from third parties;
  • to declare any interest in a proposed transaction or arrangement that the company intends to enter into.

What are the consequences of a breach? 
If a director breaches one or more of their general duties they could be disqualified from acting as a director in the future. The company may also have grounds to sue the director for the breach.

Director liability thresholds expand further in that directors can incur criminal liability for bribery, theft, fraud and health and safety offences.  This personal liability is more significant than that of a shareholder, who would ordinarily face the risk of losing the share capital of the company which is usually nominal (unless subjected to personal liability for various other reasons).

When may a Director’s actions be particularly scrutinised?

Directors’ decisions can be scrutinised at any given time.  It becomes particularly important, however, when there are creditors who may lose out financially as a result of the actions of the company – when a company goes into liquidation, for example.

During a liquidation, those responsible for carrying out the liquidation process will fully review the dealings of the company to establish whether any act or omission of the directors could amount to a breach of directors’ duties. These investigations could result in a claim being made against a former director, should a breach be found.

What about other duties and obligations?

 Aside from the main statutory legislation, there are other duties and obligations on a Director of a company. For example:

  • A director owes a duty of confidentiality to his or her company and must use or disclose the company’s confidential information only for the benefit of the company.
  • Directors are responsible for ensuring that the company complies with its obligations relating to the health, safety and welfare at work of its workers, under health and safety legislation.
  • Obligations also arise under environmental legislation and anti-corruption legislation.

Further information

Wards’ Commercial and Corporate team offer specialist one-stop-shop legal advice for all types of business – from start-ups to established companies – covering areas including setting up a new business, growing a business and financing, securing premises and strategies for business succession.  Find out more here

Get in touch

For an initial discussion or advice, please contact Solicitor Ciaran Keane on 0117 929 4811 or email Ciaran.keane@wards.uk.com. Or contact Head of Corporate and Commercial Services Marina Maclennan on 0117 929 4811 or email marina.maclennan@wards.uk.com

 

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