Across the English-speaking world, the term ‘director’ is used to describe senior management positions in companies and organisations. It’s often more or less interchangeable with the various ‘C-Suite’ titles used for senior executives.
In the UK, however, ‘director’ has a more specific, legal meaning. As defined in law, a company director is someone who shares responsibility for the management and operation of a limited company as a member of its board of directors.
Directors are appointed to the board by the company’s shareholders and are identified by name on the register held by Companies House.
These days, the legal definition of a company director in the UK has statutory status, as per the Companies Act 2006. This piece of legislation sought to clarify the legal framework for running a company in the UK by updating the mish-mash of statute and case law that had gone before.
However, despite this attempt at simplification, the 2006 Act still does not cover all the legal duties and obligations that an individual is subject to when appointed as a company director. Understanding a director’s responsibilities under UK law still requires us to wade through numerous other pieces of legislation and regulations, including those relating to insolvency, health and safety, corporate malpractice and more.
For the purposes of this article, we will break down the legal responsibilities placed on UK company directors into three categories – the so-called ‘general duties’ set out by the Companies Act 2006, further statutory duties that arise from the Act’s definition of the legalities of running of a limited company, and responsibilities and obligations that arise from other regulations.
Previously known as fiduciary duties, the core theme of this set of responsibilities is that directors should always act in the best interests of the company, and certainly not put their own interests above or in conflict with what is best for the business.
While the concept of fiduciary duties was enshrined in centuries of case and common law, the Companies Act 2006 distilled these into seven core principles which it named the ‘general duties’ of a company director:
- The duty to ‘act within powers’. Under company law, every limited company must have a written set of rules known as ‘articles of association’ which define the powers of its directors.
- The duty to promote the success of the company, which is further defined as taking decisions ‘in good faith’ to benefit the company, its shareholders, its employees etc.
- The duty to exercise independent judgement.
- The duty to exercise reasonable care, skill and diligence.
- The duty to avoid conflicts of interest. This includes actively avoiding scenarios where different business and personal interests could cause a director to act to the detriment of one organisation or the other, and is also a prohibition on exploiting company assets and information for personal gain.
- The duty not to accept benefits from third parties, unless acceptance of the benefit cannot reasonably be regarded as likely to cause a conflict of interest.
- The duty to declare interest in a proposed transaction or business arrangement. This takes the form of a formal declaration to other board members based on awareness that a proposed transaction could result in a conflict of interest, whether directly or indirectly.
The ‘general duties’ of a company director can be seen as a code of behaviour which directors have a duty to adopt upon appointment. But at the same time, as the group of individuals charged with managing a company, the directors also take on a broader set of operational duties relating to the rules for how a limited company should be run.
Again, many of these rules for company administration are defined by The Companies Act 2006. Key things the board of directors must take responsibility for include:
- Maintaining and updating company records. Records required by law include a register of key personnel such as directors, shareholders and company secretaries; records of all transactions involving the purchase of shares in the company; minutes of shareholder votes and resolutions; records of loans secured against company assets; details of indemnities and debentures.
- Maintaining company accounts and filing tax returns. This includes ensuring both balance sheets and profit and loss accounts are accurate and up to date, plus the preparation of an annual director’s report summarising the company’s accounts and financial performance. Directors are also responsible for ensuring a company’s finances are transparent and made available to stakeholders as appropriate, for example shareholders, HMRC, third-party auditors etc.
- Strategic direction. As well as providing a detailed account of a company’s financial situation at a moment in time, the director’s annual report is also expected to look forward and explain the strategic direction the company will take, including how it will navigate risks, increase profitability etc. This is especially important information for shareholders, and directors are therefore ultimately responsible to shareholders for strategic direction and performance.
- Compliance and corporate governance: Directors are responsible for ensuring that a company operates in compliance with all applicable laws and regulations. This also extends to corporate governance – directors are expected to be able to demonstrate not only that a company is in compliance with the law, but in a way that maximises the chances of success.
Other statutory duties
While the Companies Act 2006 includes the catch-all principle that company directors are responsible for ensuring a business complies with the law, the detail of what that means in practice is contained in dozens of other pieces of legislation and regulations. It is beyond the scope of this article to provide an exhaustive list of these, but some of the most important for directors to be aware of include:
- Health and safety: As enshrined in a number of different pieces of legislation (Health and Safety at Work etc. Act 1974, Employers’ Liability (Compulsory Insurance) Act 1969, Management of Health and Safety at Work Regulations 1999), company directors take ultimate responsibility for health, safety and welfare in the workplace.
- Competition law: As an extension of the general duty to oversee good governance, competition law breaches are included in the Company Directors Disqualification Act 1986 as a named reason for sanctioning directors.
- Insolvency: When a company enters or faces insolvency, insolvency law places a new duty on directors to act in creditors’ best interests to minimise potential losses.
- Environment: Section 172 of the Companies Act 2006 regarding the general duty to promote the success of the company includes the qualification that this must take into account “the impact of the company’s operations on the community and the environment.” While there is yet to be any specific legislation making directors’ responsibilities for good environmental practice explicit, the growing urgency of the climate change agenda could well see more and more directors facing personal suites for environmental breaches on the basis of this line.
Understanding director liability
One of the legal cornerstones of the limited company structure is the separation of corporate and personal responsibility. So if you are a director-owner of a business and it hits major problems financially, limited company status means creditors can’t come chasing you personally for money owed, for example.
But this separation of liabilities only goes so far. As a company director, you can’t hide behind the ‘limited liability’ principle to wash your hands of all responsibility for how a business performs. That would lead to a dangerous and chaotic economic landscape.
The legal frameworks outlined in this article define the personal responsibilities – and therefore liabilities – that directors hold within the limited company structure. That means there are consequences for failing to meet these obligations. The sanctions range from disqualification, particularly in the event of repeated breaches, to financial penalties if a director is found to have engaged in wrongful or fraudulent trading (especially in insolvency cases), to the potential for criminal charges, e.g. under health and safety legislation in cases of alleged corporate manslaughter.
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