Directors’ responsibilities

Becoming a director entails significant duties and responsibilities. At AHACCOUNTANTS, we offer professional advice to help you navigate these obligations, especially if you’re located in the Nottingham area.

The role of a director is both rewarding and demanding. Whether you are appointed to the Board of a company or take on the role while establishing a new business, it is a position that comes with a sense of achievement. However, the responsibilities associated with directorship should not be taken lightly. Below, we summarize the key provisions regarding directors’ duties as outlined in the Companies Act 2006.

Types of Companies

In the UK, businesses can operate as either:

1. Unincorporated Entities: Such as sole traders or partnerships.
2. Incorporated Bodies: Commonly referred to as companies. While there are limited liability partnerships and unlimited companies, most are limited by shares, meaning shareholders’ liability is limited to their share capital.

A limited company can be either private or public. Public companies must include “public” or “plc” in their name and are allowed to offer shares to the public. Directors of public companies face more stringent responsibilities and penalties for non-compliance.

Legal Responsibilities of Directors

As a director of an incorporated entity, you assume extensive legal responsibilities defined by the Companies Act 2006. This Act codifies existing common law rules and equitable principles concerning the obligations of directors, focusing not only on shareholders’ interests but also on the company’s broader corporate social responsibilities.

The Act outlines seven statutory duties for directors, which also apply to shadow directors. These are:

1. Duty to Act Within Powers: Directors must act according to the company’s constitution and exercise their powers for the intended purposes.
2. Duty to Promote the Success of the Company: Directors should act in a manner that promotes the long-term success of the company, considering various factors such as:

1. • Long-term consequences of decisions
   • Interests of employees
   • Business relationships with suppliers and customers
   • Community and environmental impact
   • Reputation for high standards of conduct
   • Fairness among company members

3. Duty to Exercise Independent Judgment: Directors must exercise independent judgment and can do so in accordance with agreements that restrict future discretion, provided they are authorized by the company’s constitution.
4. Duty to Exercise Reasonable Care, Skill, and Diligence: This duty imposes subjective and objective standards, requiring directors to exercise care and skill based on their knowledge and the standards expected of a person in their position.
5. Duty to Avoid Conflicts of Interest: Directors must avoid situations where their interests conflict or could conflict with those of the company, particularly in transactions involving third parties.
6. Duty Not to Accept Benefits from Third Parties: Directors must not accept benefits conferred due to their position unless the benefit does not create a conflict of interest.
7. Duty to Declare Interest in Proposed Transactions: Directors must declare any direct or indirect interest in proposed transactions with the company, providing a clear declaration of the nature and extent of that interest before the company enters into any arrangement.

Enforcement and Penalties

The Companies Act enforces these duties through actions for breach of duty, which can be initiated by:

• The company itself (via the Board or members in a general meeting).
• A liquidator during liquidation.
• Individual shareholders through a derivative action for acts of omission, negligence, default, or breach of duty.

It’s important to note that if a company is controlled by the directors, such actions may be less likely.