Directors' Responsibilities and role

The position of director brings both rewards and Directors' Responsibilities.

Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement. However the office of director should not be accepted lightly. It carries with it a number of duties and Directors' Responsibilities. We summarise these complex provisions below.

When you are appointed a director of a company you become an officer with extensive legal responsibilities. For a director of an incorporated body, the Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The Companies Act 2006 highlights the connection between what constitutes the good of your company and a consideration of its wider corporate social Directors' Responsibilities.

The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company. The aim of the codification of directors’ duties in the Companies Act 2006 is to make the law more consistent and accessible.

The Act outlines seven statutory directors' duties, which also need to be considered for shadow directors. These are detailed below:

Duty to act within their powers

As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.

Duty to promote the success of the company

You must act in such a way that you feel would be most likely to promote the success of the company (ie its long-term increase in value), for the benefit of its members as a whole. This is often called the ‘enlightened shareholder value’ duty. However, you must also consider a number of other factors, including:

• the likely long-term consequences of any decision
• the interests of company employees
• fostering the company’s business relationships with suppliers, customers and others
• the impact of operations on the community and environment
• maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company.

Duty to exercise independent judgment

You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence

This duty updates the common law rule of duty of care and skill and imposes both ‘subjective’ and ‘objective’ standards. Subjectively, you must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience, whereas objectively you must use care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director.

Duty to avoid conflicts of interest

This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.

This clarifies the previous conflict of interest provisions and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.

Duty not to accept benefits from third parties

Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party which has been obtained because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director. This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty to declare interest in a proposed transaction or arrangement

Any company director who has either a direct or indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other Directors' before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.

The requirement to make a disclosure also applies where directors ‘ought reasonably to be aware’ of any such conflicting interest.

Enforcement and penalties

The Companies Act states that they will be enforced in the same way as the Common Law, although under Company Law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.

Enforcement is via an action against the director for breach of duty. Currently, such an action can only be brought by:

• the company itself (ie the Board or the members in a general meeting) deciding to commence proceedings; or
• a liquidator when the company is in liquidation
• an individual shareholder can take action against a director for breach of duty.

Where the company is controlled by the directors these actions are unlikely.

How we can help

You will now be aware that the position of director must not be accepted lightly.

• the law is designed to penalise those who act irresponsibly or incompetently.
• a director who acts honestly and conscientiously should have nothing to fear.

We can provide the professional advice you need to ensure you are in the latter category. Please contact us if you would like more information.

Keeping the company compliant

Filing deadlines, registers and confirmation statements are the part directors most often miss. Our company secretarial service keeps them in order, and our annual accounting service handles the accounts that sit behind them.