Corporate & Commercial Law – A Guide To Directors Duties And Liabilities

This guide is a summary of the  duties and liabilities of directors of companies incorporated in the UK. It does not seek to provide a detailed analysis of your specific circumstances or every duty or obligation arising under applicable legislation and if unsure you should seek independent legal advice.

Appointment of Directors

Every company must have at least one director who is a ‘natural person’. I.e. although a company may have directors which are other legal entities, at least one of the directors must be a human being.

The company’s Articles of Association will usually set out the procedure for becoming a director, typically this includes being appointed by either the existing directors or the members of the company (although this may vary).

A director must consent to act and provide certain information to the company so that they can be registered at Companies House.

When a new director is appointed, an AP01 return will need to be filed at Companies House within 14 days.

Someone who acts as a director and exercises powers over the company as if they are a director, even if not formally appointed at Companies House, can still owe the same duties to the Company as if they had been formally appointed.

What are directors duties?

Day-to-day management and control of the Company is usually delegated to the directors and its board. Therefore, they are responsible for decision making in the ordinary course of business. That said, certain decisions will require additional consent of shareholders either under the Companies Act 2006, its Articles of Association or, potentially, under a private contract such as a Shareholders Agreement.

Because decision making is vested in the directors and they are in a position of trust, the law imposes certain fiduciary deities on those directors as well as a duty to exercise reasonable care, skill and diligence when making such decisions.

Directors of a company have various duties towards that company and its members as a whole. These arise both under the Companies Act 2006 and under the common law. These duties include:

• A duty to comply with the company’s articles of association and to act within the powers conferred on the directors by the Companies Act and the Company’s Articles of Association (s171 of the Companies Act 2006)
• A duty to act in good faith to promote the success of the company for the benefit of the members of the Company. In making decisions for the company, the directors must consider (s172 of the Companies Act 2006):
  1. the likely consequences of decisions in the long term;
  2. the interests of the company’s employees;
  3. the need to foster the Company’s business relationships with suppliers, customers and others;
  4. the impact of the company’s operations on the community and the environment;
  5. the desirability of the company to maintain a reputation for high standards of business conduct; and
  6. the need to act fairly between members of the company.
• A duty to exercise independent judgement (s173 of the Companies Act 2006)
• A duty to exercise reasonable care, skill and diligence (s174 of the Companies Act 2006)
• A duty to avoid a conflict of interests (s175 of the Companies Act 2006)
• A duty not to accept benefits of third parties (s176 of the Companies Act 2006)
• A duty to declare an interests in a proposed transaction or arrangement with the company (s177 of the Companies Act 2006)

This list is not exhaustive and the directors need to consider all factors which are relevant to the decision making made. They may be other laws which apply to the decision being made, for example Health and Safety Laws, Employment Laws or Insolvency Proceedings. In practical terms the directors should consider long-term, sustainable profitability and viability of the company. Ultimately, when considering if these duties have been fulfilled, whether that director has acted honestly and with integrity will come into consideration.

Where there is a conflict between the factors being considered, the directors should consider which course of action will best promote the overall success of the company for the benefit of its members as a whole.

In certain circumstances, directors also owe duties to consider creditors of a company. This is particularly in the context of ensuring that the company does not wrongfully trade in an insolvency situation. If a company cannot pay its debts as they fall due or if its liabilities outweigh its assets, it could be considered to be in an insolvency situation and at that point there are additional obligations on directors towards creditors and their conduct may be scrutinised.

Procedural requirements

When making decisions for the company, certain procedural requirements must be followed in order to ensure that there is the requisite authority to make that decision. The requirements themselves will vary from company to company. However, before making any decision a director should consider:

• Can they make this decision alone or do they need the agreement of other directors?
• If agreement is required (which it usually is) how can this be obtained? Is everyone in agreement and unanimous decision can be made or is a board meeting required?
• Do they have sufficient directors to form a quorum for a board meeting?
• How do you give notice of a board meeting and what notice is required?
• Are any directors interested in the decision? If so, do they still count for quorum or voting purposes?
• Is shareholder consent, whether under a special resolution, ordinary resolution or otherwise required to make the decision?

The answer to these questions will be contained in the company’s Articles of Association and the Companies Act 2006.

Accounting and administrative obligations

As a director of the company, you should note that there will be certain accounting and administrative obligations in relation to the Company which will need to be fulfilled. These may include:

• Registering the company and filing with HMRC
• Registering the company for VAT (if applicable)
• Preparing and signing off annual accounts
• Filing an annual confirmation statement at Companies House
• Undertaking filing at Companies House when required – for example whenever there is a change in directors or person of significant control
• Maintaining the Statutory Books of the Company

This is not an exhaustive list and you should consider your company’s specific requirements. You should appoint an accountant for the company who will be able to guide and assist with many of these tasks.

What if you breach your duties or procedural requirements?

Breaching directors duties or failing to follow due procedure can have the following consequences:

• It may be a criminal offence under the Companies Act 2006
• The decision that you sought to make may be void
• You could be held personally liable in administration or insolvency proceedings
• Members of a company may seek to bring a derivative claim against you for breach of duties
• You could be liable for misfeasance, breach of duty or fraudulent trading
• You could be disqualified as a director
• There could be a claim for unfair prejudice by a shareholder

Members may be able to ratify certain decisions if made outside of your powers.

A court may also grant you relief from prosecution for your actions if they consider that you acted honestly, reasonably and thought that having regard to the circumstances that the particular decision or power you had ought to be exercised.

A company may take out insurance in respect of liabilities arising as a result of negligence, breach, default or breach of trust by a director.

Ceasing to be a director and ending your duties

You can resign as a director, subject to any agreed terms of any service agreement, at which point the majority of your duties would cease. This is except for certain duties such as confidentiality and to avoid a conflict of interests which may continue after ceasing to be a director for a period of time.

You cannot resign if you are a sole director, as the Company must always have one director in office to comply with the Companies Act 2006.

You may also cease to be a director if certain events happen such as death or bankruptcy. If this happens, you would cease to be a director automatically by operation of law.

What should you do next?

If you are considering becoming a director of a Company, you should ensure that you are familiar with its Articles of Association and the provisions of the Companies Act 2006 and how they apply to you. You should seek independent legal advice if you are unsure or unclear on your duties, procedural requirements or a particular decision that you are looking to make.

For detailed, specific advice relating to your business, contact our Corporate & Commercial Team on 0800 088 6004