The Companies Act 2006 imposes certain general duties on a director of a UK limited company. The aim of this guide us to provide directors with an overview of these fundamental duties.
What is my role as a director?
A company acts through two bodies of people – its shareholders and its board of directors.
The board of directors make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations. The directors are effectively the agents of the company, appointed by the shareholders to manage its day-to-day affairs.
The basic rule is that the directors should act together as a board to reach decisions and make sure that the company’s obligations are fulfilled. If Directors do not comply with the applicable laws, they could be disqualified, found personally liable, fined, or even imprisoned.
What are my general duties under the Companies Act 2006?
As a director you must:
Act within powers
You must act in accordance with the company’s constitution (articles of association and shareholder or joint venture agreements) and only exercise your powers for the purposes for which they were given.
Promote the success of the company
You must act in the way that will most likely promote a long-term increase in value of the company for the benefit of all its members.
When considering what is most likely to promote the success of the company, the legislation states that a director must have regard to:
- the consequences of any decision
- the interests of the company’s employees
- developing good relationships with suppliers and customers
- the impact of the company’s operations on the community and the environment
- maintaining the company reputation for high standards of business conduct
- the need to act fairly
Avoid conflicts of interest
If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors.
There is no convenient set of rules to determine which situations will or will not give rise to a conflict of interest and so if you think you may be in a potential conflict situation you should:
- Seek approval– potentially a conflict situation can be approved by the other members of the board. If the board does not have the power to authorise it could refer the matter to the shareholders for approval.
- Check the articles of association– the company’s articles might contain provisions relating to conflicts of interest
Not accept benefits from third parties
You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.
Promote good governance
Governance influences how a company’s objectives are set and achieved, how risk is monitored and addressed and how performance is optimised. Governance is a system and process, not a single activity and therefore successful implementation of a good governance strategy incorporates strategic planning, risk management and performance management.
As a Director you must keep up to date:
- Statutory registers
- Accounting records
- Filings at Companies House
- Annual Reports to shareholders
What are my responsibilities on insolvency?
Where a company is in financial difficulties the directors should seek independent advice as soon as possible if they are to avoid potential personal liability under insolvency legislation. This is a particularly complex area for directors to navigate and proper legal advice should always be sought.
- Wrongful Trading – Trading whilst insolvent is not wrongful trading if you can demonstrate that your company has reasonable prospects of avoiding insolvency. This means that you must have a clear plan, (passed by the governance procedures of your company) to protect the assets and value of your company, make profit, and minimise losses. You should keep your position under constant review if you continue to trade and take appropriate advice from solicitors and insolvency practitioners.
A director does not need to have been dishonest to be liable for wrongful trading and he or she cannot avoid responsibility by resigning from the company when potential difficulties are spotted.
- Fraudulent trading – this involves a degree of dishonesty on the part of the director as the offence requires an intention to defraud the company’s creditors by continuing to trade. In this case, a director could be found personally liable.
Implications for getting it wrong
A breach of a general duty typically gives the company several potential remedies including an injunction, damages, or compensation. Failure to disclose an interest in an existing transaction or arrangement with the company also carries the risk of a criminal fine.
Can the company indemnify or insure me against claims?
A company may (but is not obliged to) indemnify you in respect of certain proceedings brought against you by third parties. An indemnity can potentially cover both the cost of the claim itself and the costs involved in defending it but never the following:
- the unsuccessful defence of or fines imposed in criminal proceedings
- penalties imposed by regulatory bodies.
It is common for a company to take out directors’ and officers’ (D&O) insurance on behalf of its directors. Policy cover and terms vary but typically deal with directors’ liabilities arising from claims of negligence, breach of duty or other default. Standard policy exclusions include fraud, dishonesty, and criminal behaviour but the directors should ensure they understand any limitations on cover and that insurance policies are kept under regular review.
If you need any advice upon being a Director or are experiencing a Director dispute and need guidance on the next steps to resolve the problem and protect the business, please contact Sean McDonough on 01225 750 000 or email email@example.com.