An overview of the duties of a company director

If you are a company director, there are various duties the law requires you to fulfil. This article focusses mainly on the duties set out in the Companies Act  2006  and looks briefly at the duties in the case of insolvency. It is not a comprehensive list of all of your responsibilities as a director. You should seek expert legal advice, if in doubt.

The Companies Act

If you are the director or a co-director of a company, the Companies Act 2006 lays down specific legal duties that you need to comply with.  These duties are owed to the company. In this article, we will explore the seven key duties set out in the legislation. If you need any help in understanding or meeting these responsibilities, we can advise you.

1 – Act within the powers of your company’s constitution

Your company’s constitution is its essential documents, including the articles of association which set what you can and can’t do as a director. Your first duty is to act within the constitution and only use your powers for specified purposes. You should therefore ensure you familiarise yourself with the relevant documents.

2 – Promote the success of the company

This is possibly the most well-known of the fundamental duties. It means that you must act in a way that promotes the success of the company for the benefit of its members. The meaning of success can vary between companies but you must always act in good faith.

As part of this duty, you must consider many issues such as the likely consequences of long-term decisions, the interests of your employees, your business relationships, your company’s effect on the community and other areas of importance.

3 – Use independent judgement

Company directors must develop their own views on company activities and make their own decisions. This means that you shouldn’t simply do what others tell you, such as other board members or shareholders and you shouldn’t delegate decisions to others either.

4 – Take reasonable care, skill and diligence

 To exercise reasonable care, skill and diligence in your director role, your work must be the same or better than a reasonably diligent person with the same knowledge, skill and experience that you would expect to find in someone performing your role. Therefore if you are an experienced director with expertise in a certain sector, you will be subject to a higher standard than a director who is relatively inexperienced.

5 – Avoid conflicts of interest

In your role as director, you must avoid any  situation where your interests could conflict with the company's interests. There are no hard-and-fast rules on conflicts of interest, but when making business decisions, you should consider:

 ●       Other companies of which you are a director;

●       Your personal situation;

●       Other roles you hold;

●       People connected to you who could benefit.

This is by no means everything you need to think about to avoid conflicts. If you’re concerned about potential conflicts of interest, check your articles of association and talk to your solicitor.

6 – Don’t take benefits from third-parties

You should never accept a benefit from a third party which arises as a result of  your position as a director, nor should you take a benefit because of something you did or did not do in your role.

7 – Declare interests

If you are directly or indirectly affected by a transaction or arrangement with your company, you must declare it to your other directors. If the transaction is proposed, you must state your interest before it is finalised. If the transaction has already happened, you must declare it as soon as is possible.

Insolvency

If you are a director of a company that is insolvent or may become insolvent soon, you must take steps to avoid liability for fraudulent or wrongful trading. In this situation, your duty to promote the success of the company for the benefit of its members switches to acting in the best interest of your company’s creditors. If you are found to have knowingly engaged in fraudulent trading, the liquidator of the company can apply to the court for a declaration that your personal assets can be used as the company’s assets in order to satisfy creditors’ claims. You should take expert legal advice as soon as possible to ensure you do not fall foul of your obligations.

Find out more from Couchman Hanson

Following your director’s duties is essential for you and your business. Failure to fulfil them could lead to you being liable for damages or compensation and /or being subject to an injunction. It could even result in criminal proceedings being brought against you in more serious cases.

If you are a director who needs advice on your duties and how best to fulfil them, or you are a co-director or company shareholder who suspects a director may be in breach of their duties, talk to a solicitor at Couchman Hanson. We’ll advise you on how to remedy the situation for everyone’s benefit.

At Couchman Hanson, our solicitors genuinely care about getting the best outcome for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits with our values of integrity, honesty and authenticity.

 Call 01428 774756 or visit couchmanhanson.co.uk