A director has statutory duties under the Companies Act 2006 and these duties are owed to the company which is a separate legal entity in its own right, rather than the shareholders.
General duties under The Companies Act 2006
The Companies Act 2006 sets out 7 general statutory duties that apply to all company directors.
These duties include –
- To exercise reasonable care, skill and diligence
- The duty to exercise care, skill and diligence derives from negligence cases imposing higher standards on directors because of their relationship with the company.
- To act with good judgement
- Directors owe this duty to their companies because they are carrying out (or claiming to be able to carry out) particular functions with a certain degree of competence for the benefit of others.
- Breach of this duty (i.e. failure to do the job properly) may give rise to a claim in negligence against the director for damages to compensate the company for the consequences of their acts or omissions.
- To exercise independent judgment
- which broadly means that they cannot allow others to influence their decisions or to make decisions for them.
- However, a strict interpretation of this rule would make managing a company very difficult, so various exceptions apply to make it much more practical – directors are generally allowed to use their own discretion, delegate functions to properly qualified individuals and they may rely on the professional advice of others – such as accountants and lawyers.
- To promote the company’s success
- Acting in a way which the director believes in good faith will promote the company’s success for the benefit of the shareholders as a whole.
- This duty to act for the shareholders’ benefit is subject to the company’s purposes (e.g. in a company set up for charitable purposes, the directors will be obliged to benefit others) and to the requirement on the directors to consider creditors’ interests in certain circumstances (e.g. where the company’s solvency is at risk)
- To act within their powers
- To act in accordance with the company’s constitution (including any decision properly taken by the shareholders)
- Not to accept a benefit (including bribes) from third parties
- Directors are not allowed to accept a benefit from a third party for not doing or doing something in their role as director.
- Caution should be exercised before accepting offers or corporate hospitality. An unreasonably high or frequent benefit provided to the director intended to win new business would be considered a bribe.
- To avoid conflicts of interest and duty –
- This covers all actual and potential conflicts between a director’s interests and the company’s, except those relating to transactions/arrangements with the company (which must be disclosed to the board under duty 7)
- To disclose their interest in a proposed transaction/arrangement
- To all other members of the board, either at a board meeting or in a written document.
- For example, if a director is also a director of another company being considered as a supplier or partner for a project. A transaction can still go ahead, but the ‘interest’ must be disclosed.
For a trading business, the term success will usually mean ‘long-term increase in value’. However, it is for the directors to decide what constitutes success for their particular business and that the courts, in any legal action against a company’s director for breach of duty, should be reluctant to substitute their judgement for that of the businesses directors.
What constitutes good judgement?
The companies act specifies a (non-exhaustive) list of factors the directors must take into account in order to show that they are solely acting to promote the success of the business, including:
- The likely consequences of any decision in the long term
- The Interests of the business’s employees
- The need to foster the business relationships with suppliers, customers and other parties
- The impact of the business’s operations on the community and environment
- The desirability of the business continuing to maintain a reputation for high standards of business conduct
- The need to act fairly as members of the business
Keeping company records
A director of a limited company must:
- keep proper company records and submit an annual confirmation statement
- details of directors, shareholders, company meetings and board resolutions, debentures, loans, mortgages, indemnities and share issues or purchases.
- You can employ a company secretary to do this for you, but ultimately you are responsible for making sure these records are filed on time.
- You can be fined up to £5000 by Companies House or disqualified as a company director if you do not keep the proper company records.
- keep robust financial accounting records and submit your company accounts to Companies House and HMRC.
- You can employ an accountant to do this for you, but ultimately you are responsible for making sure these records are filed on time.
- You can be fined up to £3000 by HMRC or disqualified as a company director if you do not keep accounting records.
- pay company taxes as they fall due to HMRC
- register for self assessment and submit a personal tax return each year
Frequently Asked Questions
Q – Can I be held liable for company debts on liquidation?
A – Limited liability companies afford their directors limited liability when things go wrong.
If a company is liquidated – the liquidator will usually work to try and recover as much cash as possible from company debtors in order to pay off company creditors. If there are not enough funds to pay those off, then the company creditors will lose out. That is part of their risk of allowing credit to another business.
You as a director or shareholder will not be personally liable for any of the company debts unless:
a) you signed a personal guarantee – say for a business loan or overdraft
b) the liquidator decides that the Directors have acted inappropriately and there has been ‘wrongful trading’. This is where the Director knows or ought to have known that there was a reasonable chance of the company becoming insolvent and would not be able to pay its liabilities, and did not take steps to protect its creditors.
Q Do I need to keep minutes if I am a sole director/shareholder of my company?
Yes. The Companies Act 2006 requires records “minutes” of your decisions as a director. These records must be retained for 10 years. The company articles of association should be appropriately modified to allow you to take day to day operational decisions about running the company on your own. Board meetings (even for one director) and minutes are more appropriate for decisions that will impact the long-term future of the company such as:
- appointing a director
- selling or buying back shares
- declaring dividends
- signing off annual accounts
Q – Do I need management accounts?
Yes!! As a director, you are responsible for making decisions that are in the best interests of the company. How can you do that properly if you do not have sufficient information about the company performance to be able to make an informed business decision?
We can help you with that!