UK Directors’ Duties

It is this separation of a Company’s legal personality from its Shareholders and the consequent limitation of Shareholders’ liabilities that makes the Company such a popular business vehicle.

However, in order for a Company to be able to carry out its necessary functions, it must act through its Directors, who manage and control the Company on a day to day basis. As a Limited Company Director, you have a number of statutory and legal responsibilities that Sole Traders do not share. This note outlines the Directors’ duties in running a Company.

Every UK Company must have at least one Director and at least one Director in each Company must be an actual person rather than another Company. Directors’ powers are quite extensive and, as a result, certain duties are imposed on Directors to protect Shareholders’ interests.

The Companies Act 2006 (“the Act”) dictates the standard to which Directors must act.

Under the Act, a Director has seven general duties, which are:

1. To act within power

A Director must act in accordance with the Company’s constitution. The Company’s constitution is usually its Memorandum and Articles of Association, which set out how the Company is to be run.

Under s.171 (b) Directors can only exercise powers for the purposes for which they are conferred. This means that they cannot exercise a power for a particular purpose when that power has been granted for a different purpose. For example, Directors generally have a power to allot new shares to raise capital. If they were concerned about a potential takeover, however, they would not be able to issue new shares for the purpose of preventing that takeover, even if they genuinely felt that to be in the Company’s best interests, as the power has been granted for the purpose of raising capital.

2. To promote the success of the company

Directors must act in the way they consider, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole. In doing so, there are certain factors that Directors should take into account and these are set out in s.172(1) of the Act as follows:

1. the likely consequences of any decision in the long term;
2. the interests of the Company’s employees;
3. the need to foster the Company’s business relationships with suppliers, customers and others;
4. the impact of the Company’s operations on the community and the environment;
5. the desirability of maintaining a reputation for high standards of business conduct; and
6. the need to act fairly as between members of the Company.

The Government has indicated that it does not intend to add to the bureaucracy of running a Company so it will sometimes be sufficient for a Director simply to conclude that one or more of these factors is irrelevant. Directors should, however, be aware of these factors and should refer to them in Board Meeting Minutes where necessary.

3. To exercise independent judgment

A Director must exercise independent judgment. This potentially makes things difficult for a Director who is appointed by a particular Shareholder, as the Director must act independently to promote the success of the Company for the benefit of the Shareholders as a whole (in accordance with s.172). The Government has stated that this section does not prevent Directors relying on advice from someone more expert than themselves – as long as they use their own judgment in deciding whether to follow that advice.

4. To exercise reasonable care, skill & diligence

Directors will be judged objectively according to the general knowledge, skill and experience that may reasonably be expected of a diligent person carrying out the functions. They must also exercise care, skill and diligence according to their actual knowledge, skill and experience. For example, if a Director has particular skills or knowledge as a lawyer they will be expected to use them and can be held to a higher standard where those skills are concerned.

5. To avoid conflicts of interest

Directors must avoid a situation in which they have or may have an interest that conflicts with the interests of the Company (s.175(1)). This applies particularly to the exploitation of any property, information or opportunity (s.175(2)) but does not apply to a conflict arising in relation to a transaction or arrangement between the Director and the Company (s.175(3)), although such an interest would still need to be disclosed to the Board of Directors.

This duty is not infringed if the situation cannot reasonably be regarded as giving rise to a conflict. Under certain circumstances, the conflict or potential conflict may also be authorised by the board.

6. Not to accept benefits from third parties

Directors cannot receive any benefit from third parties due to their being a Director or as a result of their doing (or not doing) anything as a Director. The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interests. However, this will often depend on the value or frequency of any benefits received and the relationship between the Company or the Director and the third party.

7. To declare an interest in a proposed transaction or arrangement

Whilst Directors need not avoid an interest in a proposed transaction or arrangement with the Company, they must declare the extent and nature of that interest to the other Directors. This declaration can be made at a Board Meeting or in writing and must be updated if the original declaration becomes incomplete or inaccurate.

A Director need not declare certain interests – contact us for more information on what must be declared and what exemptions are in place.

Other responsibilities

In addition to those duties conferred by the Companies Act, Directors are responsible for ensuring that the Company’s accounts are accurate and that these accounts and any outstanding tax are submitted on time. Although the preparation and submission may be outsourced, the Directors are ultimately responsible in the eyes of the law.

Directors are responsible for maintaining the Company’s statutory registers and notifying Companies House of changes to officers, Persons of Significant Control, their personal details, the Company’s registered address and any share allotments and registration of charges. The bulk of these duties are frequently delegated to the Company Secretary.

Finally, Directors have responsibilities regarding employment law, health and safety and putting into place adequate insurance.

What can go wrong?

Ordinarily, Directors properly exercising the powers of the Company as agents for the Company will not incur personal liability. This is one of the major advantages of incorporation. However, Directors may incur personal liability if they have given personal guarantees or otherwise not made clear that they are acting as an agent of the Company and not in a personal capacity.

Directors may be personally liable to the Company or to third parties from a breach of duty or statutory offence under some other specific circumstances, including acting as a Director whilst disqualified, employing illegal immigrants, Value Added Tax (VAT) evasion, failing to show the Company name on correspondence, fraudulent or wrongful trading, irregular share allotments and making a false statement in a prospectus.

What next?

Whether you are already a Company Director and would like to discuss your obligations in more detail, or you are considering an appointment, please contact Carolyn Arlett