As the director of a UK limited company, there are certain statutory duties and obligations imposed on you by the Companies Act 2006. Fail to meet these obligations and you risk being fined, prosecuted and disqualified.
This guide will provide a general overview of the key duties and obligations of a company director so you know what to expect.
What are the Duties of a Limited Company Director?
A limited company acts through two bodies of people – its board of directors and its shareholders. It is possible, and in fact quite common, for an individual to be both a company director and a shareholder. In that case, it is essential the director/shareholder is aware of the additional duties and responsibilities that go beyond those connected with their role as a director so they can wear the right hat as and when it’s required.
The directors of a company are in charge of the management of the business on a day-to-day basis. They must make operational decisions to ensure the company meets its strategic objectives. As a director, you work as an agent of the company appointed by the shareholders. A key part of that is to participate in board meetings to make decisions that fulfil the company’s obligations.
7 Duties of Directors in Company Law
The Companies Act 2006 puts ‘meat on the bones’ of the duties of directors by outlining the statutory duties that apply to all company directors.
(1) To exercise reasonable skill, care and diligence
Company directors must exercise skill, care and diligence in regard to the functions they carry out on behalf of the business. Failure to act with a certain degree of competence for the benefit of others could give rise to negligence claims to compensate the company for mistakes the directors make.
(2) To promote the company’s success
A company director must act in a way that demonstrates good faith in the business and promotes the company’s success for the shareholders as a whole. This duty relates to the purpose of the company as set out in the company’s constitution (the Memorandum of Association and Articles of Association). For example, if the company is set up for charitable purposes then the directors are obliged to work for the benefit of others.
(3) To act within their powers
Company directors are given certain powers to enable them to manage the company. They must use those powers in the best interests of the company as set out in the company’s constitution and not to further their own narrow interests.
(4) To exercise independent judgement
Directors must exercise independent judgement when making decisions and not subordinate their power to the will of others. While directors can seek professional advice, they should exercise their own judgement when deciding whether to follow it.
(5) Not to accept a benefit from third parties
Company directors must work to promote the success of the business and cannot accept a benefit (a bribe) from a third party that may cause them to do or not do something. Offers of corporate hospitality or gifts should be regarded with caution as benefits provided to a director with the intention of winning new business could be considered a bribe.
(6) To avoid conflicts of interest
It is a legal obligation for company directors to avoid conflicts of interest that relate to situations and transactions the company is involved in. Each director has a personal responsibility to avoid circumstances where they have or could have a direct or indirect interest that conflicts with the interests of the company. Non-compliance is seen as a serious breach of director duties and criminal action could follow.
(7) To disclose any interest in a proposed transaction or arrangement
If the director of a business has an interest in a proposed transaction or arrangement then it must be declared to all members of the board either at a board meeting or in writing. For example, if the company is considering using a new supplier and a director is also on the board of the potential supplier, that must be disclosed.
What other Legal Obligations do Company Directors have?
The duties of a director as set out in the Companies Act 2006 are not the only requirements directors must meet. There are also other legislation and regulations relevant to their businesses that if not met, could lead to a fine, disqualification or even a criminal conviction.
The board of directors must ensure the company complies with the relevant legislation surrounding:
- Health and safety
- Insurance obligations
- The environment
What are the Fiduciary Duties of a Director
One of the most important of all a company director’s duties relates to the preparation, content, circulation and filing of the company’s annual reports and accounts at the end of the financial year. Although most limited companies will hire an accountant to perform these tasks, it is the directors who are ultimately responsible for ensuring they are carried out.
A director’s financial responsibilities include:
- Keeping accurate accounting records so accounts can be prepared that give a true and fair representation of the company’s position.
- Submitting accurate company accounts and filing them on time with Companies House.
- Submitting an annual corporation tax return to HMRC and paying any tax due.
- Paying staff correctly and deducting income tax and National Insurance contributions where they apply.
- Trading solvently and ensuring the business is able to meet its financial obligations.
Are Directors Liable for Debt in a Limited Company?
A limited company is legally separate from the directors and shareholders who run and operate the business. When the business becomes a limited company, the directors and shareholders benefit from something called ‘limited liability’. That limits the amount they stand to lose if the business fails to the value of their initial investment. That means, ordinarily, if the company does not pay its debts or is taken to court by a creditor, it is the company’s assets that are at risk and not the assets the directors own personally.
However, in some instances, it is possible for directors to be made personally liable for company debts. That includes:
- Unpaid PAYE and National Insurance contributions on the director’s own earnings.
- Any income tax owing on money that a director has taken out of the company.
- Any personal guarantees that have been given to banks, finance companies and landlords by directors of the company.
- Liabilities that arise from acts of wrongful trading that are identified during an investigation into an insolvent company. For example, the business continues to trade while insolvent with no real chance of avoiding liquidation.
- Liabilities that arise from transactions where the business has benefited at the expense of company creditors. For example, if the assets of an insolvent company are sold for less than they’re worth.
- Any liabilities that result from an act of fraud committed by directors while running the company. For example, fraudulently taking credit in the company’s name.
What are a Director’s Fiduciary Duties in a Company?
The fiduciary duties of a company director reflect the relationship of loyalty and trust that should exist between the director, the company, its shareholders and its stakeholders. The expectation is that the director will act in good faith and the best interests of the company will be at the heart of everything they do. These duties overlap with the common law duties – to operate with skill and care – and the statutory duties laid out in the Companies Act 2006.
Broadly speaking, company directors have two fiduciary duties. They are:
- A duty of care – Directors must be diligent and careful in performing the duties they have undertaken on behalf of company stakeholders. To do that they should:
- Attend and participate in meetings
- Make reasonable enquiries regarding issues such as maintenance, rules and violations
- Make decisions
- Maintain company accounts and records
- A duty of loyalty – Directors must act in the best interests of the company even if it’s at the expense of their own interests. That duty of loyalty extends to:
- Delegating duties – Boards can delegate their duties but they must also be aware that some duties should not be delegated.
- Business judgement – Directors should exercise sound judgement. Adopting an ethics policy to guide directors can help to avoid a breach of their fiduciary duties.
- Personal liability – Directors are protected from personal liability for company debts but only if they meet certain standards.
- The statute of limitations – Action can only be taken against a company director for breach of their fiduciary duties within three years of the wrongful act.
Company directors also have non-fiduciary duties to the general public and their customers. That includes not producing marketing which may represent the company’s goods or services, and not permitting the creation of misleading financial or investment information.
What constitutes a breach of fiduciary duty?
There’s any number of different actions a director can take which could constitute a breach of fiduciary duty:
- Failing to make a business decision in good faith.
- Placing a personal interest ahead of the company’s interest.
- Engaging in conduct which is detrimental to the interest of the company with the intention of obtaining a benefit.
- Using their position to commit an offence that allows them to gain an advantage for themselves or a connected party (such as a family member) to the detriment of the business.
- Failing to trade in the best interest of creditors when the company is insolvent.
- Obtaining information dishonestly and using the information to gain an advantage for themselves or a connected party.
Do directors have a fiduciary duty to shareholders?
Directors must ensure that the information they provide is clear and comprehensive and not misleading. However, the courts have ruled that in the absence of a ‘special relationship’, the directors owe a fiduciary duty to their company but not the company’s shareholders per se.
A director can owe a fiduciary duty to a shareholder in particular cases, for example, if there’s a personal relationship between the director and the shareholder or there’s a specific transaction that triggers a fiduciary duty.
What are the Potential Penalties for Failing to meet your Duties as a Director?
A director who breaches their duties is most likely to face repercussions taken by the company itself in the form of a civil action. It can also be the case that one or more shareholders will make a claim against a specific director if they have suffered a loss and the company will not make a claim. Equally, the director could be the subject of an investigation by a third party such as the Department of Trade or the Insolvency Service.
The consequences of a breach can include:
- Removal from office – A company director can be removed from their position either temporarily or permanently if at least 50 percent of the shareholders vote to do so.
- Damages or compensation for financial losses incurred – In serious cases, the director can be pursued through the courts, potentially leading to the loss of personal assets and even bankruptcy.
- Personal liability for company debts – Directors that allow their company to trade while it’s insolvent could be made personally liable for the repayment of company debts.
- Setting aside transactions – Transactions that were entered into which were not deemed to be in the best interests of the company can be cancelled.
- Criminal fines – Offences which are most likely to attract criminal fines relate to the failure to file documents at Companies House either on time or at all.
- Disqualification as a director – Some types of conduct can lead to the disqualification of the director for a period of up to 15 years. This is reserved for serious cases such as fraudulent behaviour, failing to keep proper accounting records and serious health and safety shortcomings.