You have probably seen a lot of articles hammering on about the benefits of being a director of a company. Being a company director can be rewarding and looks good “on paper”. While a directorship can sound glamorous, it involves considerable work, diligence, responsibility, time commitment, decision-making, long term strategic and business planning and accountability.
The Directors of a UK company are legally responsible for running the company and for making sure that the company accounts and reports are prepared in line with the law.
A company director can be removed from office for a number of reasons and can be held personally liable for the company’s debts in certain cases.
Business risk is a reality. However, it is not all doom and gloom. Being a director can be a valuable contribution to our country’s economic and social welfare. However, before you decide to become a company director you should understand the duties and responsibilities that come with the position.
What are the Duties of a Director?
The Companies Act 2006 has outlined the following to be the fiduciary duties of a Director of a UK Limited Company:
1. Duty to act within powers
This is a fiduciary duty which provides that a Director is to use the powers given to him by the company’s memorandum and articles of association (ie the company’s constitution) and only exercise his powers for the purpose for which they were given.
A company’s Articles of association is a legal document which sets out the rules for governing a company and the duties, responsibilities and powers that Directors have. A Director will be in breach of his duties if he acts outside the powers conferred on him by the articles. For example, a Director would be in breach of his duty to act within powers if he makes a decision which is not allowed by the company’s articles of association.
2. Duty to promote the success of the company
A Director must act in a way he/she considers, in good faith, would most likely promote the success of the company for the benefit of its members (Shareholders).
A subjective test is applied to this duty. The subjective test provides that the Director is not in breach of this duty if he honestly considered that his actions were to promote the success of the company or to achieve a certain purpose.
Directors must take into consideration various issues such as the consequences of the decisions they make, the impact of their decisions on the community and environment, the interests of the company’s employees and its business relationships with suppliers, customers and others. Directors must also act fairly between shareholders and should always consider the company’s reputation when making decisions.
3. Duty to exercise independent judgment
A director must exercise independent judgment. This means that Directors must exercise their powers and act independently when making their decision (ie reach their own judgment without allowing others to influence them or make the decision for them) and fettering their discretion.
4. Duty to exercise reasonable care, skill and diligence
This duty requires a Director to carry out their functions with reasonable skill, care and diligence as would be exercised by a reasonable diligent person with the general knowledge, experience and skill that could reasonably be expected from a person carrying out the director’s functions and the director’s actual general knowledge, skill and experience.
The duty will be breached if the Director is incompetent or negligent and falls below the required standard behaviour.
This test is analysed in two parts:
The objective requirement- this sets out the minimum standard required for a Director. A Director must meet the objective requirement if he/she wants to avoid the breach of this duty. The standard varies and depends on the functions and responsibilities of the Director as well as the situation of the company.
The subjective requirement- this requirement focuses on the knowledge, skill and experience of a Director. The position is that the Director concerned will be judged by a higher standard, if he possesses a higher standard of general knowledge, skill or experience that is reasonably expected under the objective test.
Directors will not be able to avoid liability under this duty by claiming that they lawfully delegated their responsibilities to another Director or person.
5. Duty to avoid conflicts of interest
A Director has a duty to avoid any situation in which he has or could have a direct or indirect interest that conflicts or could conflict with the company’s interests. This applies in particular to the use or exploitation of information, contractual opportunity or property regardless of whether the company could take advantage of it.
A director must also take into account any potential conflicts of interests or conflict of duty which may arise in the future and applies also to the interests of persons connected with the director (ie “connected persons”).
6. Duty not to accept benefits from third parties
A Director has a statutory duty not to accept a benefit from a third party given to him because of his position as a director of the company, unless it has been approved by the members of the company (ie the shareholders) or it can reasonably be regarded as not giving rise to a conflict of interest with the company. This includes not taking advantage of property, information or opportunity belonging to the company for personal use.
7. Duty to declare interest in transactions or arrangements with the company
A Director must declare any direct or indirect interests he has in an existing and or proposed transaction or arrangement with the company.
This is to ensure that a Director makes a full disclosure of interests before the company enters into a contract with the Director.
The declaration can be made orally at a Director’s Board meeting or by notice which must be in writing. If the declaration is made in writing, it must be on paper or electronic form and can either be sent by hand, post or electronically. A declaration may also be made by general notice.
A Director is not required to declare an interest if he is not aware of the fact that he has an interest in the transaction or arrangement in question. However once he becomes aware of the interest he must declare the interest.
A company director or prospective director should ensure they are aware of their duties and responsibilities and potential personal liability and take legal advice on ways to protect themselves legally. You should consider if you have the traits to make a successful company director and seek advice on how you can limit the risks involved in being a director of a company.
How can Pure Business Law Help?
As a director you should obtain legal and other advice when uncertain of the implications of a matter affecting the company; act with honesty, reasonableness and integrity at all times; document decisions and decision making processes to show a reasonable and proactive approach to issues; remain vigilant, aware and professional at all times and keep up with the law.
There is no excuse for not being aware of the law.
Pure Business Law are specialist Business & Commercial Solicitors based in Bedford and London and operating nationally. We have a lot of experience helping directors and companies. If there is something that you would like to discuss or if you are concerned about any of the issues raised above please contact us or telephone us on 01234 938 089 or 0207 8460123 or 07745 996907.
Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.
Please note: This article is for general information only and does not constitute legal or professional advice.