Directors’ duties – what you need to know, part 1

In the first of a two-part series, we look at duties placed upon directors of a limited company

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Many companies registered with Companies House are small companies that start as a one-director company and remain so until the demise of either the director or the company itself.

In many cases directors have no understanding as to what being a director actually entails or what the consequences are of getting it wrong. Many directors look upon the company as being an extension of their self employment.

The main point is that the company is a separate legal entity. It has its own rights and can take its own actions sometimes against its own directors.

One of the points to consider when starting a new business and choosing the trading medium is the appointment of directors, and the duties placed on them.

Appointment of a director

Companies Act 2006 Part 10 Chapter 1 defines the rule governing the appointment of a company director:

  • the requirements state that a person of at least 16 years of age may become a company director
  • persons who are currently disqualified from being a company officer or those who are undischarged bankrupts are prohibited from being company directors
  • it is only possible to appoint a corporate director if there is at least one other director that is a natural person
  • apart from the disqualification and bankruptcy provisions, in reality Companies House will accept nominations for any persons the shareholders of a given company deem fit to act in that capacity.

Directors’ duties

There are three main elements to the directors’ duties:

  1. Fiduciary duty – is a legal obligation from one party to act in the best interests of the other party. The courts have always regarded directors as being ‘fiduciaries’ and as a result the directors are required to act in good faith, in the best interests of the company and must not abuse the trust and confidence placed in them
  2. Duty of skill and care – a director of a company must exercise reasonable care, skill and diligence. So directors with particular skills are expected to bring those skills for the benefit of the company
  3. Statutory duties – are duties imposed by Companies Act as well as other relevant legislation. The Act ‘codifies’ long-established common-law principles by spelling them out in sections 170-177.

Duties stated in the act include:

  • duty to act within the company’s powers
  • duty to promote the success of the company
  • duty to exercise independent judgements
  • duty of skill, care and diligence
  • duty to avoid conflicts of interest
  • duty not to accept benefits from third parties and duties to declare interest in a proposed transaction or arrangements.

The directors have other duties in areas such as health and safety, bribery law, employment law and tax, etc.

Implication of the breach of duty

Requirement to return any property wrongly taken from the company or to pay damages

Where the directors are held to be in breach, they can be required to return any property wrongly taken from the company or to pay damages to the company.

Under the Companies Act, any shareholder has the right to apply for permission to bring proceedings against a director in respect of any alleged negligence, breach of duty or breach of trust. The court will consider if the applicant was acting in good faith, whether the shareholders had authorised or ratified the breach being complained of and whether the conduct of the director concerned was consistent with the requirements set up in the Companies Act.

Director’s personal liability in respect of debts and losses of their company

Under a limited number of circumstances directors can be made personally liable for debts which they allow their company to run up. Some of the circumstances in which a director can be held personally liable are:

  • wrongful trading
  • acting in breach of disqualification orders
  • involvement with phoenix companies
  • making deceitful declarations to creditors of the company regarding the settlement of debts.

In the second and concluding part of this series, we will consider the process and implications of disqualification as a director.