Whether you are starting a new venture, or you have been a company director for several years, you must understand your responsibilities.
Not complying with directors’ duties can lead to disqualification, financial penalties, and even imprisonment.
In this article, you will find the scope of directors’ duties, as set out in the Companies Act 2006 and other legislation such as the Health and Safety at Work Act 1974.
What are directors’ duties?
All company directors must comply with the directors’ duties set out in Chapter 2 of Part 10 of the Companies Act (CA) 2006.
These are:
- To act within powers.
- To promote the success of the company.
- 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 any interest in a proposed transaction or arrangement with the company.
The above are often referred to as ‘general duties’ as their purpose is to promote the company’s general success. However, other directors’ duties may be included in the company’s Articles of Association.
Here is a detailed summary of each director’s duty under the CA 2006:
Duty to act within powers
As a director, align your actions with the company’s constitution, encompassing Articles of Association, resolutions, and agreements. Additionally, adhere to the equitable principle of ‘proper purpose,’ ensuring powers are exercised only for their designated purposes.
Duty to promote the success of the company
Acting in good faith is crucial in fulfilling this duty. Various factors must be considered, such as the long-term impact of decisions, employees, relationships with stakeholders, community and environmental impacts, and maintaining the organisation’s reputation for integrity.
Duty to exercise independent judgment
Directors cannot delegate decision-making powers and must protect themselves from external influences. Seeking advice is permissible, but ultimate judgments must be based on individual assessments.
Duty to exercise reasonable care, skill, and diligence
Directors must act with the diligence expected of a reasonably diligent person.
Duties relating to conflicts of interest
You should avoid situations that could result in conflicts of interest, such as personal involvement in opportunities related to the company. Also, ensure you disclose potential conflicts to fellow directors, ensuring transparency.
Duty not to accept benefits from third parties
Be sure to exercise caution when accepting gifts or benefits to prevent conflicts of interest.
Duty to declare interest in proposed transaction or arrangement
Fully disclose any interest in a proposed commercial transaction or arrangement to other directors, even if not directly involved.
To whom are the directors’ duties owed?
As per the CA 2006, directors owe fiduciary duties to the company where they hold office and must act consistently with these duties.
Are there directors’ duties contained in other legislation?
Yes.
Examples include:
- The Health and Safety at Work etc Act 1974 – sets out the basic health and safety duties of a company, its directors, managers, and employees. It also acts as the framework for other health and safety regulations. Under the Act, all employers must ensure the health and safety of their employees, carry out “sufficient and suitable” risk assessments, and provide information, protective measures, and training to employees concerning any identified risks. This is merely a small sample of relevant health and safety duties and responsibilities.
- The Insolvency Act 1986 – if a company becomes insolvent, the duties of the director/s change from promoting the company’s success to protecting creditors’ interests. If a director knows or ought to know that the company cannot avoid insolvency and continues to trade (wrongful trading) or carries on with business as usual with the intention of defrauding creditors (fraudulent trading) they can face severe sanctions, including a custodial sentence.
- Environmental law – a director can be liable for an environmental offence if they commit it personally, a point particularly relevant for small businesses. A director and a company can also be jointly charged with committing an offence if it was perpetrated with the director’s cooperation and consent or attributable to the director’s negligence.
Breaching directors’ duties relating to health and safety, insolvency, and/or the environment can lead to significant reputational damage, even if you are not found liable for the alleged offence.
It is, therefore, vital to understand the duties owed under each of these areas, and if an incident occurs resulting in a regulatory or police investigation, contact an experienced Solicitor immediately.
What is the Company Directors Disqualification Act (CDDA) 1986?
The CDDA 1986 sets out the procedures used to investigate and disqualify company directors suspected of misconduct.
The Court can consider cases on application from the Secretary of State and disqualify a director for up to 15 years.
Most disqualification applications are made under section 6 of the CDDA 1986, which states that the Court can make a disqualification order if it is satisfied that:
- the person has been a director of a company which has at any time become insolvent (whether while the person was a director or subsequently), or
- the person has been a director of a company which has at any time been dissolved without becoming insolvent (whether while the person was a director or subsequently), and
- The Court is satisfied that the person’s conduct as a director of that company makes the person unfit to be involved in the management of a company.
How to ensure you comply with directors’ duties when launching a new business
Launching a new company is a busy and exciting time. It may seem intimidating to know that you must have a minimal understanding of a company director’s statutory and regulatory duties and responsibilities.
However, several different organisations can assist you with finding out the compliance requirements relevant to your industry, including, to name but a few,
The Federation of Small Businesses
You will also be able to access a great deal of information from your industry’s regulatory body and via networking.
If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice immediately.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.
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