Summary
- Directors owe seven general duties to the company under the Companies Act 2006, covering matters from acting within their powers to declaring an interest in a transaction.
- These duties apply to executive, non-executive, de facto and shadow directors, not just directors who are formally registered at Companies House.
- A breach can lead to a court order to repay profits, compensate the company, return property or accept an injunction.
- This guide explains the seven statutory director duties for UK company directors and shareholders.
- LegalVision’s corporate lawyers advise UK businesses on authorising director conflicts of interest, structuring board decisions and responding to an alleged breach of duty.
Tips for Businesses
Check the articles of association before making major decisions, since acting outside them breaches the first duty. Log any personal interest in a company transaction and route it to the board for authorisation before acting. Keep board minutes showing independent judgement, especially where an outside adviser is consulted. Speak to a business and commercial lawyer at LegalVision about setting up a conflict authorisation process for your board
UK company directors owe seven general statutory duties to the company under the Companies Act 2006. These are the duty to act within powers, promote the success of the company, exercise independent judgement, exercise reasonable care, skill and diligence, avoid conflicts of interest, avoid accepting benefits from third parties, and declare an interest in a proposed transaction. Every director owes these duties to the company itself, not to individual shareholders, and the duties apply equally to executive, non-executive, de facto and shadow directors. A director who breaches a duty risks a court order to repay profits, compensate the company for its loss, or return company property. 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.
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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.
“Most breach of duty claims I see do not start with dishonesty. They start with a director who never put a conflict to the board because the transaction seemed obviously fair to them. Authorisation is not a formality, it is the only thing that protects a director once someone else disagrees with that judgement”
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.
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.
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.
Frequently Asked Questions
What is the difference between a de facto director and a shadow director?
A shadow director is someone whose instructions the board habitually follows without holding the formal role. A de facto director acts as a director in practice, such as making key decisions or signing contracts, without formal appointment. Both can owe the same duties as a properly appointed director.
What happens if a director breaches a duty?
A director who breaches a duty can face a court order to repay personal profits, compensate the company for its loss, return company property, or accept an injunction stopping further breaches. The company can also terminate the director’s service contract for the breach.
Is a director personally liable for company debts?
A director is not automatically liable for company debts, since a limited company is a separate legal entity. Personal liability can arise where a director gives a personal guarantee, continues trading while insolvent, or breaches a statutory duty that causes the company loss.
How does a director avoid a conflict of interest?
A director avoids a conflict of interest by disclosing it to the board before acting and obtaining authorisation from the independent directors. The conflicted director should not vote on the matter or use their position to influence the outcome of the decision.
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