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 should feel a sense of achievement.
However the office of director should not be accepted lightly as it carries with it a number of duties. Our solicitors can advise you in fulfilling your duties as summarised below.
Even a director of a sole director/shareholder company must consider the implications of these duties.
What is the role of a director?
A limited company is operated by two parties: the shareholders and board members (made up of directors).
The Board of Directors is responsible for managing the business on a day to day level; they make decisions on strategy and operation and are able to enact a legal obligation. You have the duty, as a director, to attend board meetings to determine these decisions and ensure that the company fulfills all its obligations to the shareholders and the business.
As representatives of the shareholders and stakeholders, they serve as the governing body responsible for making key decisions that will influence the direction, objectives and operations of the business.
The directors are often appointed by shareholders to handle company operations.
A director should have the skill and experience expected to be able to carry out the director's functions.
Responsibilities can include:
- charting out a clear vision and strategy for the company
- setting policies to guide organisational behavior
- monitoring metrics to ensure progress towards objectives is made
- appointing senior management to lead initiatives.
Directors are responsible for accounting to those who rely on their investment in the company - typically shareholders - by providing information relevant to financial performance. Together these activities set up the foundation needed for an effectively managed organisation.
Appointing the first director
The first directors of a company are appointed at the time of its registration.
After that, subsequent appointments of directors follow the rules set out within the company's articles of association.
Generally speaking, the board of directors will fill vacancies or appoint additional directors up to the number specified by the articles.
Appointing a new director requires the gathering of various personal details for formal record keeping. This includes:
- full name
- address
- date of birth
- nationality
- country of residence
- former names
- business occupation.
The director must sign a consent form confirming readiness to act in such a role.
Companies House allows directors to opt in to have a service address listed on their public profile; this gives them the option to use the company’s registered office address instead of their home address.
Directors with shares
Before getting started, the director will need to follow any share-qualifications specified in the articles.
As director of the company, you have a responsibility to declare any interest you have in the company's shares in order to maintain adequate disclosure and transparency.
To get an overall assessment of the company, directors should obtain copies of the memorandum and articles of association; pertinent details concerning the business affairs; statutory reports and accounts for two previous years; and appropriate board minutes and management accounts.
The Companies Act 2006 sets out seven statutory directors' duties, which also need to be considered for shadow directors.
Duty to act within powers
As a 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.
The company's constitution includes the model articles of association which outlines how the company will be run.
Duty to promote the success of the company
A company director should look to improve the long-term success of the company, by helping to increase its value.
You must act in such a way that you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
You must also consider a number of other factors, including:
- the likely long-term consequences of any decision
- the interests and responsibilities to the company's employees
- fostering the company's business relationships with suppliers, customers and others
- the impact of operations on the community and environment
- maintaining the company’s 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.
A director's duties should include the making of independent decisions, without relying on other directors, experts or influencers.
Duty to exercise reasonable care, skill and diligence
You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience, together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director.
A director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.
A director should also be able to fulfill their role e.g. a finance director with no experience in being a finance director may be deemed to be in breach of their duties.
A director's actual understanding of the role may still not be enough if there could reasonably be more expected from someone in a similar position.
Duty to avoid conflicts of interest
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.
This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity.
It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.
Duty not to accept benefits from third parties
This duty states that you must not accept any benefit from a third party which has been conferred 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 proposed or existing transactions or arrangements
Any director who has either a direct or an 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.
However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or 'ought reasonably to be aware') of the interest.
Enforcement and penalties
The Companies Act provides for civil consequences for breach of general duties of directors. Any director who “authorises or permits, participates in, or fails to take all reasonable steps to prevent” a breach may also be committing a statutory offence.
We can help you get a better understanding of your duties as a director.
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