Directors Duties

4Do you understand the implications of accepting a directorship?

Directors are personally liable for actions or omissions, can be disqualified from acting as a Director and can be made personally liable for the company’s debts.

Did you know that as a director of a limited company, you have a duty to try to make the company a success, using your skills, experience and judgment?

Company Directors have responsibilities which include ensuring that the company trades lawfully and complies with all legislation and regulation.

Their responsibilities are a series of statutory, common law and equitable obligations owed by members of the Board of Directors to the organisation that employs them.

Statutory and regulatory responsibility varies in different jurisdictions, but there are a number of similarities in the framework for directors’ duties.

  • GDirectors owe duties to the company , not to individual shareholders, employees or creditors except in exceptional circumstances.
  • Directors’ core duty is to remain loyal to the company, and avoid conflicts of interest
  • Directors are expected to display a high standard of care, skill or diligence
  • Directors are expected to act in good faith to promote the success of the corporation

While this system works well in many countries, some countries have a weaker culture and tradition of enforcing these values, and a greater cultural tolerance for conflict-of-interest. Judges may be less likely to review transactions to decide whether they are fair to minority shareholders.

As a director of a limited company, you have a duty to try to make the company a success, using your skills, experience and judgment. You must also follow the company’s rules, make decisions for the benefit of the company, not yourself, and declare to other shareholders if you personally benefit from a company transaction or contract.

The board of directors of a company is primarily responsible for:-

  • setting the company’s strategic objectives and policies
  • monitoring progress towards achieving the objectives and policies
  • appointing senior management
  • Accounting for the company’s activities to owners or shareholders.

The Chief Executive Officer, or Managing Director if there is no CEO, is responsible for the performance of the company, in line with the Board’s overall strategy. He or she reports to the Chairman or Board of Directors.

The first directors of a company are appointed at the time of its registration. Subsequent appointments are governed by the company’s Articles of Association or Shareholders Agreements.

On appointment a new director will be asked to provide certain personal information for registration. They will normally give notice of any interests in contracts involving the company and their interest in the company’s shares.

A newly appointed Director should make themselves familiar with the company’s Memorandum and Articles of Association, details of the business e.g. recent board minutes and management accounts, and the statutory reports and accounts for at least the past two years.

The Directors are responsible for the management of the company within the relevant legal system and the articles of association. For example, articles of association may include restrictions on borrowing by the company.

The directors must act collectively as a board but the articles usually allow the board to delegate powers to individual directors as appropriate.

Directors need to be aware that they are personally subject to statutory duties in their capacity as directors of a company. In addition the company, as a separate legal entity, is subject to statutory controls and the Directors are responsible for ensuring that the company complies with them.

In the UK the Companies Act 2006 sets out seven general duties of directors which are:-

  • to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred
  • to promote the success of the company for the benefit of its members
  • to exercise independent judgment
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare an interest in a proposed transaction or arrangement

In the UK these statutory duties are interpreted in accordance with previous case law which remains relevant.

In addition to the seven general duties listed above, a director will be subject to other regulation and legislation including the Insolvency Act 1986, the Company Directors’ Disqualification Act 1986, the Health and Safety at Work Act 1974 and the Corporate Manslaughter and Corporate Homicide Act 2007.

Directors may be liable to penalties if the company fails to carry out its statutory duties. If they had reasonable grounds to believe that a competent person, such as another director or third party, had been given the duty to see that the statutory provisions were complied with, then they may use that as a defence.

Another responsibility of the directors is to ensure that the company maintains full and accurate accounting records. A balance sheet and a profit and loss account for each financial period must be presented to shareholders and filed with the Registrar of Companies.

Directors are personally liability, both civilly and criminally, for their actions or omissions, when directing the company. They can also be disqualified from acting as a director of a company, and can in certain circumstances be made personally liable for the company’s debts.

They also need to ensure Health and Safety at Work is complied with and can be charged with Corporate Manslaughter and Corporate Homicide. If a director is found guilty of these acts or omissions they can be fined and imprisoned and disqualified.

You can ask other people to manage some of these things day-to-day. For example, an accountant can manage your accounts for you – but you’re still legally responsible for them.