If you are a Company Director, or planning on becoming a Company Director, there are some important duties and responsibilities that you should be aware of. Company Secretarial expert Anna-Lisa Brandini, explains all in this article. Please take some time to read through these notes as they are important, and please get in touch if you have any queries at all by using the contact form at the bottom of the page.
Please take some time to read through these notes – they are important.
Directors’ Duties and Responsibilities
The Companies Act 2006 (the Act) sections 170-178 set out the legal responsibilities and general duties of company directors and are known as the Statement of General Duties of Directors. This is based on established common law principles and case law, but also includes important reforms which affect all directors – executive or non-executive – in every company, large or small.
The Statement of General Duties of Directors came into effect on 1 October 2007, except for the duty to avoid conflicts of interest, which came into force in October 2008.
The main principles are summarised below:
1. The general duties mean a director must act in the interests of the company and not in the interests of any other parties – including shareholders.
The general rule is that directors do not owe fiduciary duties to shareholders, duties are owed to the company! For an exception to the general rule, it must be something unusual in the nature of the relationship to give rise to this/special circumstances replicating features of fiduciary duty. The mere fact that a director has a superior knowledge of company affairs/or their actions have potential to affect shareholders does not amount to these special circumstances.
The company comes first. This principle applies even for `one man’ companies, which means a sole shareholder/director may not put his/her interests above that of the company.
2. Duty to act within the company’s powers
In addition to the duties and responsibilities imposed on directors by the Act, every company will have its own set of rules known as its `constitution’ better known as the Company Articles of Association, it is important that you are familiar with these.
- It is your duty to act in accordance with the company’s constitution; that is, directors must observe any restrictions contained therein.
- The powers delegated to directors by the shareholders must be used for the benefit of the company.
3. Duty to promote the success of the company
The term `success’ is not defined in the Act because this may vary from company to company. However, the underlying principle is that every director has a legal duty to try and act in such a way which, in their judgement, is most likely to bring sustainable profitability.
4. Duty to exercise independent judgement.
This is self-explanatory but the Act will not be breached if you act in accordance with any prior agreement with the company on the exercise of your duties or as laid down by the company’s constitution.
5. Duty of skill, care, and diligence
Every director must exercise reasonable care, skill, and diligence. The duty extends to everything that directors do. This duty is broken into two parts:
- as a director you must show the general knowledge and skill which may reasonably be expected of a person carrying out the functions you carry out in relation to the company. Thus, a managing director will be expected to have a knowledge of all areas of the business or to have engaged people who can help them; and
- as a director you must also act in accordance with any specific general knowledge and skills you actually have. Therefore, a director who is a qualified accountant would be expected to show greater general knowledge, skills, and interest in relation to financial aspects of the company than another director who was not so qualified.
6. Duty to avoid conflicts of interest
You must not allow any personal or outside interest to affect your duty to the company.
You must, therefore, avoid any situation where you personally have, or may have, a direct or indirect interest which conflicts, or may conflict, with the interests of the company.
This duty even extends to former directors.
However, this duty is not infringed if:
- the situation cannot reasonably be regarded as likely to give rise to a conflict; or
- the matter has been authorised by the directors, as appropriate to the type of company (public companies must give the directors specific powers in their articles)
7. Duty not to accept benefits from third parties
A director of a company you must not accept a benefit from a third party arising for any reason of you being a director; or your doing (or not doing) anything as a director.
Any benefits that cannot reasonably be regarded as likely to give rise to a conflict of interest can be ignored.
This duty also applies equally to former directors.
8. Duty to declare an interest in a proposed transaction or arrangement
The Act states: “If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company he (she) must declare the nature and extent of that interest to the other directors”.
The declaration of an interest can be either verbal or written but most comply with the requirements set out in the Act.
- Minimum age
The minimum age at which someone can be appointed as a director is 16 years.
- Corporate directors
It is only possible to appoint a corporate director so long as there is at least one other director who is a human being.
- Registration and publication of directors’ residential addresses
It is no longer necessary to include directors’ home addresses on public records. You can use a `service’ address such as the company’s registered office. It is still necessary to keep a separate register of directors’ residential addresses.
ADDITIONAL DUTIES
In addition to the duties discussed above, as a director you will continue to have responsibilities and duties for, amongst other things, ensuring that:
- the company is not wrongfully trading
- the company does not pay an illegal dividend
- you are not illegally involved with `phoenix’ companies – where the assets of a failed company are moved to another legal entity.
- you are not acting in breach of disqualification orders
- accounts are prepared properly, with proper keeping of books and records.
You need to be aware that there are civil and criminal sanctions and penalties for breaches of your responsibilities and duties as a director.
A copy of The Companies Act 2006 Its Implications for Company Directors gives fuller guidance on the duties and responsibilities of directors. You can obtain a copy or more information on the law by speaking to Sanchana Mishra or Suzanne Gaulton in our Company Secretarial Department.
Business Stationery
Under the Companies Act 2006, a limited company must display the following information (in legible print) on all business letters, faxes, and order forms; and also on the company’s website, and as part of its email messages:-
- Name;
- Place of registration (i.e. `England and Wales’ or `Scotland’);
- Registration number;
- Registered Office address
Display of Company Name
New provisions have been introduced requiring the display of a company’s name where it can be ‘easily’ seen by any visitor: –
a) At its Registered Office;
b) At any place where it carries on business – unless that is a living/home address; and
c) At any place where records that can be inspected under the Companies Acts are held.
There are fines for failure to comply with the display requirements, and in extreme cases a company’s contractual arrangements may be at risk if a name display has not been properly made.
Please note that where we provide Registered Office facilities the law is complied with through a continuous computer display.
Filing Accounts
Both Company Law and Revenue Law impose penalties if accounts are filed with the authorities late. It is Company Law penalties that will arise first, so you must comply with the filing regulations if you wish to avoid being fined.
Your company’s completed accounts will need to be filed with Companies House within 9 months of your accounting year end. If the accounts are filed even a day late, there is an automatic penalty of £150, rising to £375 if the delay runs to more than a month. For even longer delays, the penalty rises progressively to £1,500, and if accounts are filed late in successive years, these penalties will double.
You should aim to provide your books and records in good time to ensure that the accounts can be produced before the filing deadline arrives.
Shareholder Succession
It is likely that you now own shares in the company, if so, these shares are a potentially valuable asset forming part of your estate. In the event of anything happening to you, you need to ensure that your Will leaves these shares to the right person: the constitution of the company will enable the shares to pass to your executor should something happen, but it will not dictate to whom you wish to bequeath the shares. So, if you already have a Will you should think about updating it, and if you don’t have a Will, you should take the opportunity to make one.
Sole Directors
If you are the only director of the company, you again need to think about what the position of the business will be if something should happen to you. It is likely that the company will need to continue, at least in the very short term (e.g., to collect any debts owing to it) and to do so it will need a formally appointed director. If you are no longer on the scene, the identity of the new director will ultimately be down to new shareholder(s), but you should give some thought to who you would like to take on the role and to make sure that both that person and your beneficiaries know what your preference is.
If you need any guidance, or have any questions on your Directors’ duties, please contact us below:
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