This post is intended to give a thorough overview of the duties imposed on all directors of a UK limited company by the Companies Act 2006.
What is my role as a director?
A company acts through two groups of people: (1) its shareholders, and (2) its board of directors. The board of directors are in charge of the day-to-day management of the company’s business: they make the strategic and operational decisions of the company and are responsible for ensuring that the company complies with its obligations.
An individual directors role is to participate in board meetings to enable the board to reach these decisions and make sure that the company’s obligations are fulfilled.
Directors / Boards / Capacities
It is good corporate governance for directors to act together as a board. It introduces checks and balances, prevents power being concentrated in the hands of one individual and encourages diversity of thought and approach.
However, boards can (and often do) delegate certain powers to individual directors or to a committee. This can be because an individual has particular expertise that other directors don’t have, or simply that it is more efficient to have one individual driving a process.
Directors may also be a shareholder, employee (or both) of the company which comes with additional rights and duties above those arising from their role as a director. It is crucial that directors ensure that in every situation they ensure that they recognise in what capacity they need to act and comply with the relevant duties.
What are my general duties under the Companies Act 2006?
Duty 1 | Act within powers |
Explanation | Act in accordance with the company’s constitution (i.e. the articles of association / board resolutions / shareholder agreements / joint venture agreements), and only exercise your powers for the purposes for which they were given. |
Duty 2 | Promote the sucess of the company |
Explanation | Act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. What exactly constitutes "success" will vary, especially if the company is for example, a certified B-Corp. However, the legislation helpfully sets out a list of non-exhaustive factors that directors should consider, including:
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Duty 3 | Exercise independent judgment |
Explanation | Directors must exercise independent judgment and make their own decisions. N.B. directors must still act in accordance with the company's articles / any binding shareholders' agreement. What this means is that directors cannot simply rubberstamp the wishes of a dominant founder director without asking questions / making appropriate challenges, especially if what is being proposed isn't clearly in the interests of the rest of the shareholders. |
Duty 4 | Exercise reasonable care, skill and diligence |
Explanation | Exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
The expected standard is measured against objective (the skills the director should have) and subjective (the skills the director does have) standards. This means that if a director doesn't have much experience, their actual understanding and abilities may not be enough if it could be reasonably expected that a person holding that position should have better skills. Equally, a director who is a trained accountant will be held to a higher standard on financial matters than one whose background is that of an architect or lawyer. |
Duty 5 | Avoid conflicts of interest |
Explanation | Directors must avoid a situation in which they have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This duty is not infringed if:
There is no convenient set of rules to determine which situations will or will not give rise (or potentially give rise) to a conflict of interest. Classic examples of where there might be conflict of interest include: (1) being a director or shareholder of a competitor; (2) a director takes advantage of a commercial opportunity that they heard about as a result of their position as a director; (3) a director wears another hat within the company (i.e. they act as the company's accountant); or (4) a family member of a director finds themselves in a similar situation to that outlined in (1)-(3). If a director thinks they may be in (or could soon be in) a potential conflict situation they should:
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Duty 6 | Not accept benefits from third parties |
Explanation | Directors must not accept a benefit from a third party given because they are a director or because they take (or do not take) an action in their capacity as a director. N.B. like with conflicts of interest, there is no issue if the director’s acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest. If for example, they accepted a bottle of water from a supplier on a site visit then nobody would be ringing them up to note that they mustn't accept benefits. If however, the same supplier offered a director the use of a holiday house for a month over the summer, it is likely to require much more careful consideration. |
Duty 7 | Declare interests in proposed or existing arrangements with the company |
Explanation | If a director is in any way, directly or indirectly, interested in a transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction, they must do this before it is entered into. In the case of an existing transaction, they must do this as soon as reasonably practicable. This duty is not infringed if:
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What penalties are there if a director breaches their general duties?
Company remedies include injunctions, claims for damages or compensation. Failing to disclose interests properly can also lead to criminal sanctions and bans from acting as a director.
How can companies protect their directors?
It is sometimes possible for a breach to be ratified by a shareholders' resolution.
The company may have D&O (Directors & Officers) insurance in place (although this won't cover fraud).
Companies sometimes indemnify their directors against costs (mainly legal) incurred in successfully defending a claim for breach of duties owed to the company.
What about other duties and obligations?
A director owes a duty of confidentiality to his or her company and must use or disclose the company’s confidential information only for the benefit of the company.
Directors are also responsible for ensuring that the company complies with obligations imposed by health and safety, environmental and anti-corruption legislation. Discussion of these topics is beyond the scope of this note.
What are my responsibilities on insolvency?
Insolvency adds an additional layer of complexity, and where a company faces a real prospect of going out of business, its directors should try and speak to specialists ASAP.
Key points to note include:
Duty to act in best interests of members flips to creditors – where a company is (or is on the verge of being) insolvent, a director must stop acting in the best interests of shareholders (members) and must instead make all of their decisions based on what is in the best interests of the company’s creditors (i.e. the people it owes money to)
Wrongful trading – this is a specific offence under the Insolvency Act, and states that a director can be ordered by the court to contribute towards the general pool of assets available to creditors (i.e. to put some of their own money into the company). A director commits an offence here if they:
knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration
continue to allow the company to trade after he or she knew or ought to have so concluded
do not take every step he or she ought to from that time to minimise the potential loss to creditors
N.B. a director doesn't have to be dishonest to potentially be liable for wrongful trading
Fraudulent trading – this offence (in contrast to wrongful trading) requires an intention to defraud the company’s creditors or some other fraudulent purpose. A director may be required to contribute to the company’s assets available for distribution to creditors or may face criminal proceedings.
N.B. it is often difficult to prove this offence as it requires evidence of subjective dishonest intention
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Real legislation heads can check the duties out in full here in section 171-177: https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2/crossheading/the-general-duties
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