Directors' duties

There are several variations of the type of Director in a company:

  • Executive Directors are involved in the day to day running of the company.
  • Non-executive Directors usually only attend board meetings and their role is to bring an independent and objective view to board meetings
  • Shadow Directors are persons who are not appointed Directors but on whose instructions the board normally acts, not including professional advisers
  • De facto Directors are persons who are not properly appointed Directors but assume the status and functions of a Director

There is no distinction made between the legal duties of Executive and Non-Executive Directors.  As a Non-Executive Director, you must be as diligent and keep yourself as informed about the financial affairs of the company as Executive Directors.

As a Director, you are considered to be the agent of your company with the authority to bind the company.  Directors are in a fiduciary relationship with their company, that being a relationship of trust and utmost good faith.

The legal duties imposed on Directors seek to protect the company by regulating their behaviour.  The duties apply to all Directors who owe the duties to the company, rather than to the shareholders, creditors or other Directors.

There are seven main statutory principles which you must abide to as a Director, which are contained in the Companies Act 2006 (“the Act”):

Duty to act within powers

You must use your powers for a proper purpose, and must act within the powers conferred by the company’s constitution (Memorandum and Articles of Association).

Duty to promote the success of the company

You are required to act in a way which you consider, in good faith, would promote the success of the company for the benefit of its shareholders as a whole.  In fulfilling this duty, you must have regard to a number of factors, including:

  • the likely consequences of any decision in the long term
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of company conduct, and the need to act fairly as between the shareholders

You should think of the impact of your decisions beyond the company and the shareholders alone.

Duty to exercise independent judgment

You must exercise independent judgment; this does not prevent you from delegating certain responsibilities (so long as this is permitted by the Company’s constitution) or seeking expert opinion so long as the experts appear to be qualified to give the advice required and that you still exercise your own judgment in relation to the advice received.

Duty to exercise reasonable care, skill and diligence

This duty seeks to ensure that you carry out your functions carefully and competently, exercising the care, skill and diligence which would be expected of a person with:

  • the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by that Director
  • the general knowledge, skill and experience that the Director actually has
Duty to avoid conflicts of interest

Unless the company has given them consent, you must not put yourself in a positon which would cause a conflict between your personal interests and your duty to the company.  Furthermore, you must not make a personal profit from being a Director unless previously authorised by the company. This duty can continue to exist even after you cease to be a Director of the company.

Duty not to accept benefits from third parties

You must not accept a benefit (e.g. a bribe, or perhaps more favourable treatment) from a third party which is given to you because of you being a Director, or because of your acts or omissions as a Director.

Duty to declare interest in proposed or existing transactions or arrangements with the company

You must disclose to the company any interest you have in a proposed or existing transaction or arrangement with the company.  You can declare your interest at a board meeting of the Directors, or by sending a written notice to the other Directors.  Failure to declare an interest in an existing transaction or arrangement with the company is a criminal offence for which you could be fined, unless it was previously disclosed as a proposed transaction.  If there is a conflict, your declaration of it should be recorded in the minutes of the board meeting at which you declare it.

 

As well as the seven statutory principles above, which are contained in the Act, there are a number of other duties which are imposed upon a Director.  These include, but are not limited to:

  • A duty of confidentiality to the company
  • A duty to ensure that the company maintains proper accounting records and to ensure that the accounts are properly filed at Companies House
  • A duty to ensure that the company files annual returns and other statutory filings and keeps the statutory registers of the company up to date.  As a new Director, you may wish to find out answers to such as questions relating to statutory books, where they are kept and who is responsible for the annual accounts and necessary returns to Companies House

To find out more about the consequences of a breach of duty by a Director, click here.  To discuss Directors' duties more with a member of the team, contact:

Steven Grant on 023 8071 7445 or email stevengrant@warnergoodman.co.uk
Naushad Rahman on 023 8071 7409 or email naushadrahman@warnergoodman.co.uk

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