Understanding your responsibilities as a director

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A lot of you reading this will already be company directors, while some of you may be thinking about setting up a company and becoming a director of it. We’re therefore starting a series of posts about directors of UK companies and the Companies House requirements that relate to them. The starting point for any company director, and therefore the brief first port of call for this series, is to understand the director’s responsibilities and duties.

While a company’s shareholders own the company, they delegate the running of it to the directors (although in a lot of cases the directors and shareholders will be the same people). Clear and fair responsibilities for the directors are important both to protect the interests of shareholders and so the directors themselves know what’s expected of them, what they can do and what they can’t. If directors fail in their responsibilities, the consequences can be severe.

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The Companies Act 2006 lays down several general duties that apply to all directors:

  • a duty to act within their powers, as laid out in the company’s Memorandum and Articles of Association as well as other sources
  • a duty to promote the success of the company. More on this below.
  • a duty to exercise independent judgement
  • a duty to exercise reasonable care, skill and diligence
  • a duty to avoid conflicts of interest
  • a duty not to accept benefits from third parties
  • a duty to disclose interests in a proposed transaction or arrangement

the duty to promote the success of the company lies at the heart of a director’s duties

While it has no privileged status in law, the duty to promote the success of the company lies at the heart of a director’s duties. Other directors’ responsibilities, whether or not specified in UK legislation, could be seen as following from that. In promoting the success of the company for the benefit of its shareholders as a whole, the Companies Act says that directors should consider the impact of decisions, the company’s reputation and the interests of other stakeholders including shareholders, employees, suppliers, customers as well as the wider community.

The directors may generally exercise all the company’s powers. However, the company’s Articles of Association may place restrictions on directors’ powers in certain areas – common examples being limitations on the directors’ borrowing on behalf of the company and restrictions on the allotment of new shares in the company. In this way, it is common for the directors to have to offer new shares to existing shareholders before being able to invite applications more widely.

The articles will also define how decisions must be made. While limited company directors will act collectively as a board to bind the company, the articles usually empower the board of directors to delegate powers to individual directors as they consider appropriate. An individual director’s  specific responsibilities within a company may differ based on the size of company, the number of directors and the nature of the company’s business. A director’s own role, experience and expertise will also influence their areas and scope of responsibility.

directors’ responsibilities should always be agreed and documented

Given these variations and to support accountability and transparency, directors’ responsibilities should always be agreed and documented. In that way, unnecessary duplication and “gaps” in directors’ responsibilities can be avoided.

There are other specific requirements placed upon directors by case law and other legislation, including:

  • the Company Directors’ Disqualification Act 1986;
  • the Insolvency Act 1986; and
  • the Corporate Manslaughter and Corporate Homicide Act 2007.

More generally, obligations are placed on directors by health and safety legislation. We look elsewhere at a company’s health and safety responsibilities.

In the next of this series on UK company directors, we look at who can and can’t act as directors as well as the process of appointing them.

Inform Direct is the perfect way for directors to manage their company's records, helping them meet their responsibilities.

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