What are the Directors’ Duties in the UK?

As a business owner in the UK, you may find that your role is a company director. Being a company director means you have several legal duties to fulfil, including obligations to your shareholders. Additionally, you will need to ensure that you focus on your company’s success. The Companies Act 2006 outlines a director’s legal responsibilities and highlights the seven general duties you need to be aware of. This article will provide an overview of directors’ duties and other responsibilities you have as a company director. 

Overview 

The concept of incorporation refers to the fact that a company is its own legal person, which means it can own property, enter into a contract, and sue and be sued. In this sense, a corporation can take actions that humans can take.

However, a company is not a natural person for obvious reasons. It cannot physically negotiate contracts on its own behalf, sign agreements, or enforce its rights against others. In order to do these things, it needs human agents to act in the company’s best interests. These people are the company’s ‘officers’, which in most cases are directors. Company secretaries are the other main type of company officer. 

What is a Company Director?

A company director is responsible for managing a company’s day-to-day business. Typically, larger companies will have a board of directors who will meet regularly to discuss business strategies. Further, the board of directors will oversee most of the decisions regarding the business.

 There are several different types of directors, including:

• executive directors – who are typically full-time employees of the company;
• non-executive directors – who will not be full-time employees of the company or run any day-to-day business but will still participate in board meetings;
• de jure directors – who will be registered as a director with the Registrar of Companies;
• de facto directors – who are not directors by name but will perform the role of a director; and
• shadow directors – who will have significant influence over the board of directors but may also not be a director by name. 

Duties vs Responsibilities

In general, we can distinguish between a director’s ‘general duties’ and ‘specific responsibilities’. 

The law imposes general duties on all directors, regardless of what company they work for or what industry they operate within. They are contained within the Companies Act 2006, which is the primary piece of legislation that governs companies in England and Wales. 

We can contrast these general duties with more specific responsibilities. Some of these are other ‘statutory duties’ (i.e., those prescribed by law), such as ensuring the company meets its filing requirements with Companies House.

We will focus on general duties in this article because they are universal to all directors. If you are a director, you may have additional specific responsibilities on top of general duties. 

What are the Directors’ Duties?

The Companies Act 2006 has codified seven individual duties that all directors owe to their company. We will consider each of the seven duties in turn, providing examples of how these duties operate where helpful.

1. Duty to Act Within Your Powers

Your power as a director comes from your company’s constitution. Your company’s constitution consists of:

• rules set out in the company’s articles of association; and
• any resolutions and agreements passed by the company’s shareholders and directors that affect the company’s articles of association.

This duty requires that you only act within the scope of the powers given to you by your company’s constitution. Therefore, you should ensure that you understand the full extent of your powers and not exceed your limits. 

2. Duty to Promote the Success of the Company 

This is one of the more controversial duties. It states that as a director, for every decision you make, you must act in such a way that promotes the company’s success for the benefit of all the shareholders. However, in doing so, you must also have regard to:

• any long-term consequences; 
• the interests of your company’s employees; 
• the interests of your company’s business relationships such as its suppliers and customers; 
• any impact on the environment and community; 
• any impact on the reputation of your company; and
• the requirement that you must act fairly among all the company’s shareholders. 

In effect, the law requires you to consider more than just maximising your company’s profits. But somewhat confusingly, you will not necessarily have to act in such a way that accounts for the listed factors. Instead, you must demonstrate that you considered these factors before acting. 

Practically speaking, any time you and the other directors prepare to make any decision, you should ask if such a decision could reasonably relate to the specified factors. If so, you should document the fact that you considered the relevant factors and document any discussions related to the factors.  

3. Duty to Exercise Independent Judgement

As a director, you must exercise your judgment and act alone. This duty requires that you always act independently and not under the influence of a third party. 

Practically, this is often an issue where a director relies on the advice of a third party, such as an accountant or consultant. As long as you exercise your own independent judgment when evaluating the advice, you will not be in breach of your duties. 

4. Duty to Exercise Reasonable Care, Skill and Diligence 

The law requires that directors act with a bare degree of competence. This standard has two elements:

• the objective standard, which refers to the ‘general knowledge, skill and experience’ that one can reasonably expect of all directors; and 
• the subjective standard, which encompasses any particular expertise or skills you have. 

For instance, all directors must act as would any reasonable director. Therefore, if you fail to deliver your accounts to Companies House, this could feasibly be a breach of this duty because you would have fallen below the standard one can expect of all directors. 

5. Duty to Avoid Conflicts of Interest

As a director, you must avoid situations that create conflicts of interest with the company’s interests. You must also avoid situations that may conflict with the company’s interests. 

As a director, you can seek the authorisation of other directors provided they are independent and have no interest in the potential situation. If the directors authorise your action, there is no risk of breaching this duty, provided they have all the information they need to make an informed decision.

6. Duty Not to Accept Benefits from Third Parties 

Suppose you are an electrician. You visit a job as a company director to speak with a potential client and secure a contract for your company. After talking, the potential client turns your company down but offers you the same contract in your personal capacity. If you accept, you may be in breach of this duty, because this is a benefit you obtained in your office. 

7. Duty to Declare an Interest in Transactions with the Company 

Similarly to the duty to avoid conflicts of interest, if you have an interest in any transaction, you must declare it to the other directors. If you do not, you will be in breach of this duty as well. 

Moreover, this duty also applies to situations where you may not have a direct interest in the transaction, such as if your brother is selling a piece of land to your business. This is an indirect interest, but you must still declare it.

Company Registers

When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.

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Consequences of Breaching My Duties?

There may be consequences for breaching your duties. However, it depends on which duty you breach and the fallout from the breach.

For example, if you:

• make any personal profit in breaching the duty, a court can order you to repay the amount;
• cause the company any loss in the course of breaching the duty, a court can order you to compensate the company;
• take company property, you can be ordered to return it;
• plan to breach your duty, such as if you try to enter into competition against your company, the court can issue an injunction. An injunction is an order not to do something.

Key Takeaways

All directors owe certain general duties to their company. These duties are codified in the Companies Act 2006 and are broad in their scope. You should familiarise yourself with each of these general duties, because if you breach them, you can face civil consequences. 

If you need help with corporate governance, our experienced business and commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us at 0808 196 8584 or visit us on our membership page.

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