An Overview of Your Duties as a Director of a UK Limited Company

As a director of a UK limited company, you hold a position of significant responsibility. In this comprehensive guide, we will walk you through the essential duties mandated by the Companies Act 2006. Understanding these duties is crucial for fulfilling your role as a director and ensuring the success of your company.

1. Your Role as a Director

As a director, you play a vital role in the company’s management, working alongside shareholders. The board of directors is responsible for making crucial strategic and operational decisions, ensuring compliance with statutory regulations, and overseeing the company’s day-to-day operations. Your active involvement in board meetings enables informed decision-making and the fulfilment of the company’s obligations.

Directors act as agents of the company, appointed by shareholders to oversee its affairs. While the board generally acts as a collective body, specific powers may be delegated to individual directors or committees. It is essential to understand the distinctions between your roles as a director, shareholder, and employee, and to assume the appropriate responsibilities accordingly. This guide focuses exclusively on your duties as a director.

2. Your General Duties under the Companies Act 2006

The Companies Act 2006 outlines several general duties that directors must adhere to. These duties encompass the following:

  • Act Within Powers
    You must operate within the boundaries set by the company’s constitution and exercise your powers only for their intended purposes.
  • Promote the Success of the Company
    This crucial duty requires you to act in good faith and make decisions that you believe will promote the company’s success, benefiting its members. Consider various factors, including the long-term consequences of decisions, the interests of employees, business relationships with suppliers and customers, the company’s impact on the community and the environment, maintaining high business conduct standards, and treating all members fairly.
  • Exercise Independent Judgment
    Directors must exercise independent judgment and make decisions based on their own assessments, even if they seek professional advice.
  • Exercise Reasonable Care, Skill, and Diligence
    Directors are expected to demonstrate the level of care, skill, and diligence that can reasonably be expected from someone in their position, considering their knowledge and experience.
  • Avoid Conflicts of Interest
    Directors should avoid situations where their personal interests conflict or could conflict with the interests of the company. If conflicts arise, they must be disclosed and, if necessary, approved by the board or shareholders.
  • Not Accept Benefits from Third Parties
    Directors should not accept benefits from third parties due to their directorial role.
  • Declare Interests in Transactions or Arrangements
    If you have an interest, direct or indirect, in any transaction or arrangement involving the company, you must declare its nature and extent to other directors.

3. Are the General Duties Mutually Exclusive?

No, more than one duty may apply in any given situation. For instance, when evaluating whether a course of action promotes the company’s success, you must also consider your duty to act with reasonable care, skill, and diligence. Similarly, you must adhere to the company’s constitution, even if an alternative approach appears to benefit the company more.

4. Who Do You Owe Your General Duties To?

Your general duties are owed to the company you serve as a director and not to other group companies or individual shareholders. The company can take enforcement action against you if you breach these duties. In certain circumstances, individual shareholders or a group of shareholders can also pursue a claim against you for breaching your duties on behalf of the company.

5. Penalties for Breaching General Duties

Breaching a general duty may result in various remedies, such as injunctions, damages, or compensation for the company. Failure to disclose an interest in a company transaction may lead to a criminal fine.

6. Relief for Breach of General Duties

If you breach a general duty, there may be avenues for relief. For instance, the breach could be ratified by a resolution of the company’s shareholders, or the court may grant relief if you acted honestly and reasonably. Additionally, the company may provide assistance by indemnifying you against costs incurred while defending a claim for breach of duties.

7. Other Responsibilities under the Companies Act 2006

Apart from the general duties, the Companies Act 2006 imposes various other obligations on directors concerning the company’s annual reports and accounts, transactions with the company, and loans made by the company to a director.

8. Other Duties and Obligations

In addition to those mandated by the companies legislation, directors have responsibilities arising from common law principles and other sources. These encompass duties of confidentiality to the company, health and safety obligations, and compliance with environmental, competition, and anti-corruption legislation.

9. Responsibilities on Insolvency

If your company faces financial difficulties or insolvency, seek independent advice promptly to avoid potential personal liability. Key issues in such situations include wrongful trading, fraudulent trading, and misfeasance, which directors must navigate cautiously.

10. Indemnification and Insurance

A company may choose to indemnify you against certain proceedings brought by third parties. Additionally, directors’ and officers’ (D&O) insurance is commonly taken out by companies, covering liabilities arising from negligence, breach of duty, or other defaults.

In conclusion, being a director of a UK limited company entails significant responsibilities. Understanding and fulfilling your general duties is essential for the company’s success and safeguarding yourself from potential liabilities. Whenever needed, seek professional advice to ensure compliance with the Companies Act 2006 and other relevant legislation. For expert assistance with accounting, compliance, company secretarial, and company formations, trust our experienced team at MJB Avanti. We are here to support you on your journey as a director and help your business thrive.