Once you become a company director, you are bound by certain duties and responsibilities that are enshrined in law. In this guide, we’ll take a look at the legal duties of a company director as outlined in the Companies Act 2006, the articles of association and the service contract between the director and the company.
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- What does it mean to be the director of a company?
- What are the broad responsibilities of a company director?
- The 7 legal duties of a company director
- What are the legal duties of company directors in insolvency?
- How to prove you’re meeting your duties as a company director
- What are the penalties for breaching your duties as a company director?
- What can directors do to avoid breaching their legal duties?
- Are you worried about breaching your duties as a company director?
What does it mean to be the director of a company?
A company director is someone who is appointed to manage the finances and day-to-day business activities of a limited company on behalf of its shareholders. However, it’s not only the shareholders of the company that the directors are answerable to.
There are a set of statutory duties and responsibilities that all company directors must adhere to. Failure to do so could lead to potential repercussions in the form of fines and penalties, personal liability for company debts, disqualification from acting as a company director for up to 15 years and even criminal charges. That’s why it’s so important to understand what your legal duties and responsibilities are.
What are the broad responsibilities of a company director?
The Companies Act states that the role of directors is to act in such a way that promotes the company for the benefit of its shareholders as a whole. To do that, they should take into account long-term factors such as the interests of other stakeholders, the company’s reputation and the impact of the company on the local community.
The broad roles and responsibilities of a company director are to:
- Ensure annual accounts and returns are produced and received by Companies House
- Keep accurate and up to date company records
- Be responsible for the health and safety of employees
- Be answerable to the owners of the limited company
- Be responsible for entering into credit agreements on behalf of the company
- Register to pay business tax and file tax returns and annual accounts to HMRC
- Use or disclose the company’s confidential information only for the benefit of the company
- Report company changes to Companies House
- Follow environmental and anti-corruption legislation
- Follow statutory duties as set out in the Companies Act 2006 (below)
The 7 legal duties of a company director
As a company director, you must perform seven statutory duties as set out in the Companies Act 2006. These apply even if you’re not active in your role as a company director, you act as a director but have not been formally appointed or you control the board of directors without being on it.
- To act within the powers giving to you in the articles of association
The articles of association is a document that forms the central part of the company’s constitution. It sets out the rules by which the company must be run and administered. That includes the appointment of directors, directors’ powers and responsibilities, the issuing of new shares and the procedures relating to board meetings and shareholder decisions.
As a company director, you must be familiar with the articles of association and abide by the rules included in it. If you exceed your decision-making powers or do not follow the procedures set out in the articles of association, decisions you make could be overturned and you may have to compensate the company for any financial losses resulting from them.
- To promote the success of the company
This duty may seem self-explanatory, but it does have some important implications. It dictates that company directors must act in the best interests of the company as a whole. That includes stakeholders such as employees, customers, suppliers and communities, as well as the shareholders and executives. The aim is to broaden the company’s objectives so they are not solely financial.
A new reporting requirement introduced in 2019 means that all companies with more than 250 employees now have to explain the steps they have taken to fulfil this duty in their annual report.
- To exercise independent judgement in decision-making
Company directors must educate themselves about all areas of the business so they can make informed decisions rather than relying solely on the knowledge or judgement of experts. Directors must also make decisions independently and not bow to the will of major shareholders.
- To exercise reasonable care, skill and diligence
Company directors are expected to exercise reasonable care, skill and diligence in every aspect of their role. There was a time when directors could be appointed purely for their name or reputation, without having to fulfil any of the responsibilities associated with being a board member. This duty ensures that company directors must be able to perform the functions of a director with competence. Failure to do so could lead to claims for negligence.
- To avoid conflicts of interest
Company directors must avoid situations where their objectivity and loyalty to the company could be compromised. A conflict of interest can exist where a company director:
- Has business or personal relationships with individuals who could be affected by the activities of the company.
- Acts as the director or has shares in another company that could be affected by the activities of the company.
- Holds an advisory position in a firm that competes with the company.
- Takes advantage of property, information or opportunities belonging to the company for their personal gain.
Failure to avoid or disclose any direct or indirect interest the director has in company transactions or arrangements could lead to criminal action.
- To refuse benefits from third parties
As part of their duty to avoid conflicts of interest, company directors must refuse any benefits or gifts from third parties. This is a threat to a director’s objectivity. Third parties include any people or corporate bodies other than the company that the directors are in contact with. This duty is not infringed if your acceptance of the gift does not give rise to a conflict of interest.
- To declare an interest in a proposed transaction or arrangement
If a director has a direct or indirect interest in a proposed transaction or arrangement with the company, they must declare their interest to the other board members. It will then be up to the non-conflicted directors to manage the situation and maintain the board’s integrity.
What are the legal duties of company directors in insolvency?
When a business is experiencing financial difficulties to the extent that the company becomes insolvent, the general duties of the company directors change. Rather than promoting the success of the company, the director must act in the best interests of the company’s creditors. That duty is owed to the company’s creditors as a whole and not one or more specific creditors.
Once a company is deemed to be insolvent, the company directors must seek professional advice and take action to begin an informal or formal procedure that will prioritise the repayment of the company’s debts. If you take action to show that you are attempting to satisfy the company’s creditors, it is possible to avoid the closure of your company and to continue trading.
To meet your legal duties as the director of an insolvent director, you must NOT:
- Carry on your business, enter into new contracts and continue to trade with no intention of repaying your creditors.
- Attempt to repay your creditors by conducting transactions you cannot fulfil or securing loans using false or misleading information.
- Sell assets at less than market value to raise funds to repay the company’s debts
- Repay certain creditors in favour of others
How to prove you’re meeting your duties as a company director
It is your responsibility as a company director to prove that you are meeting your legal obligations. Taking accurate and comprehensive minutes in board meetings will provide an official record of the matters discussed, any concerns raised, the decisions made, and, where applicable, the reasons for those decisions. This will help to demonstrate that the directors present were acting in accordance with their duties under the Companies Act. Board meeting minutes must be kept for a minimum of 10 years.
What are the penalties for breaching your duties as a company director?
There are a number of penalties that can be handed down to company directors who do not meet their legal duties. The repercussions are most likely to come in the form of civil action taken by the company itself, or by the shareholders if they have suffered a loss and the company decides not to make a claim. However, the director could also be subject to a third-party investigation by the Department of Trade or the Insolvency Service.
The potential penalties for breaching your duties as a company director include:
- Removal from your position as a director – A company director can be removed from their position for a breach of duties if 50 percent of the shareholders vote to do so.
- Pay compensation for the financial losses incurred – In more serious cases, the shareholders can pursue company directors through the courts for the losses they have incurred as a result of a breach. If their claim is successful, personal assets can be at risk and directors could face bankruptcy.
- Transactions set aside – Transactions that are entered into by the directors of insolvent companies that are not deemed to be in its best interests can be cancelled and the company restored to the position it would be in if the transaction had not been made. The beneficiary of the transaction may have to make a payment to the insolvent company or transfer an asset back.
- Personal liability for company debts – One of the biggest concerns for directors of insolvent companies is being made personally liable for the debts of the company. A director can be ordered by the court to contribute towards the pool of assets available to company creditors if acts of wrongful trading, fraudulent trading or misfeasance are proved.
- Disqualification from acting as a company director – Directors who breach their duties can also be disqualified from acting as a company director for a period of between two and 15 years. Disqualifications can be handed down for failing to pay tax, continuing to trade when the company is insolvent and failing to cooperate with the official receiver.
- Criminal convictions – The most serious cases of misconduct can lead to criminal convictions and fines. That includes breaches such as failing to keep proper accounting records, fraudulent behaviour, health and safety violations and the misappropriation of company funds.
What can directors do to avoid breaching their legal duties?
To avoid breaching your legal duties, you must understand your role within the company and take an active approach to fulfilling your duties. You should monitor the financial position of the company constantly, regardless of whether you are the financial director, and keep your duties in mind as set out in this guide.
You should also ensure that the minutes of directors’ meetings are maintained at all times and make sure they show everything that the directors have considered when making decisions, regardless of how those decisions worked out. If there’s a dispute between company directors, it should always be noted in the minutes, along with the reasons why. This is particularly important when the company is struggling financially.
Directors can be made jointly and severally liable for a breach of responsibilities, so if there is a disagreement between directors, your position must be recorded in the minutes. The liquidator or administrator must investigate the conduct of each director individually, so that could be enough for a potential liability to fall on other directors rather than you.
If you are concerned with the way the company is being run, you should not turn a blind eye. If you do, you could be just as culpable as the other directors. Make sure your misgivings are recorded in the minutes and take legal advice if necessary. In some circumstances, you may choose to resign if you disagree with your fellow directors, but your resignation cannot be used to avoid your duties or escape the potential consequences of a breach of your duties.
Directors’ liability insurance is a policy it might be worth considering if you’re worried about the consequences of breaching your directors’ duties. It will provide cover against the cost of legal advice and damages awarded against you in certain circumstances. However, premiums can be expensive and the cover is limited.
Are you worried about breaching your duties as a company director?
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