What are the Duties of a Limited Company Director?
As the director of a UK limited company, there are certain statutory duties and obligations imposed on you by the Companies Act 2006. If you fail to meet these obligations, you risk being fined, prosecuted, and disqualified.
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.
A director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred.
172
Duty to promote the success of the company
A director must act in good faith to promote the success of the company for the benefit of its members, considering factors such as long-term consequences, employee interests, business relationships, community and environmental impact, reputation, and fairness between members.
173
Duty to exercise independent judgment
A director must exercise independent judgment, though this is not infringed if acting in accordance with an agreement or the company’s constitution.
174
Duty to exercise reasonable care, skill and diligence
A director must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of a director and the general knowledge, skill and experience that the director has.
175
Duty to avoid conflicts of interest
A director must avoid situations where they have, or could have, a direct or indirect interest that conflicts with the interests of the company.
176
Duty not to accept benefits from third parties
A director must not accept benefits from third parties given by reason of their being a director or their doing (or not doing) anything as a director.
177
Duty to declare interest in proposed transaction or arrangement
A director must declare the nature and extent of any direct or indirect interest in a proposed transaction or arrangement with the company before the company enters into the transaction or arrangement.
Duty to act Within Powers
The duty to act within powers requires directors to operate within the scope of the company’s constitution and exercise their powers only for the purposes for which they were granted.
Section 171 of the Act states that a director must “act in accordance with the company’s constitution, and only exercise powers for the purposes for which they are conferred.”
Duty to Promote the Success of the Company
Section 172 establishes the duty to promote the company’s success. Directors must act in a way that they consider, in good faith, would be most likely to promote the company’s success for the benefit of its members as a whole.
This duty involves considering the long-term consequences of decisions, the interests of employees, fostering business relationships, maintaining a reputation for high standards, and acting fairly between members.
Duty to Exercise Independent Judgment
Section 173 enshrines the duty to exercise independent judgment. Directors must make decisions objectively without being unduly influenced by others.
This duty is crucial for ensuring that directors act in the best interests of the company and its shareholders rather than being swayed by personal interests or external pressures.
Duty to Exercise Reasonable Care, Skill, and Diligence
Directors must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions of a director.
This duty ensures that directors apply their knowledge, expertise, and experience when fulfilling their roles and responsibilities.
Duty to Avoid Conflicts of Interest
Section 175 establishes the duty to avoid conflicts of interest. Directors must avoid situations where their personal interests may conflict with their duties to the company. If a conflict arises, they must disclose it and follow appropriate procedures, such as obtaining approval from the board or shareholders.
This duty is crucial for maintaining the integrity and objectivity of directors’ decision-making processes.
Duty not to Accept Benefits From Third Parties
The duty not to accept benefits from third parties is outlined in Section 176 of the Companies Act 2006. Directors must not accept benefits from third parties that are likely to give rise to a conflict of interest.
This duty aims to prevent directors from being unduly influenced by external parties and ensures that they act solely in the best interests of the company and its shareholders.
Duty to Declare Interest in Proposed Transactions or Arrangements
Section 177 imposes the duty to declare interest in proposed transactions or arrangements. Directors must declare any direct or indirect interests they have in proposed transactions or arrangements with the company.
This duty promotes transparency and allows the company and its shareholders to be aware of potential conflicts of interest, enabling informed decision-making.
It is worth noting that in addition to the Companies Act 2006, directors’ duties may also arise from other sources, such as the company’s articles of association, case law, and general principles of corporate governance. Directors should be aware of their responsibilities and seek professional advice if they are unsure of their obligations.
Fiduciary Duties of a Director
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.
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.
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 are 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.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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