Understanding director's duties

What is the difference between an owner and a director?

An owner of a limited company owns shares in it, and they receive dividend payments in return for their investment, but these shareholders will not be involved in the day to day running of the company, and have no duty of care to it, whereas as a director may not have a financial stake in the company but will have the power to control it, deal with customers, suppliers, and employees, and is responsible for ensuring all laws and regulations are complied with.

But 45% of all the limited companies in the UK are single employee companies, which tends to mean one person is the sole shareholder and director. Also, most small businesses in the UK are run by one or more directors who are also all shareholders. This makes up 99% of all businesses in the country. That means most business owners need to be aware of their legal duties and make sure they don’t fall foul of the law when running the business.

If someone has director in their title, do they have director’s duties?

No, not necessarily. Some people have titles including the word ‘ director’ but that does not mean they are directors for the purposes of the Companies Act; and some company directors do not use the title ‘director’ but are registered as directors with Companies House.

Who has director’s duties?

All directors of limited companies have legal duties which they must comply with. This includes all persons registered as directors. It doesn’t matter what role a director plays in the day to day running of the business, they must all comply with the duties.

What are the seven main duties?

There are seven ‘general duties’ which directors must comply with. They are:

1. The duty to act within his powers: meaning you must only act in compliance with the company’s articles – it’s rules, and you can only exercise the powers for the purpose for which they were granted. So, if for example the articles do not give the director power to purchase property for the company, he can’t do that.
    
2. The duty to promote the success of the company: which means the director must act in a way he considers would be most likely to promote the company’s financial success, for the benefit of the shareholders as a whole, or in a way that is fair between all shareholders. And he must take into account factors including the long term consequences of his actions; the employees; good relationships with the customers and suppliers; the impact on the community and environment and in a way that maintains a good reputation for the business.
    
3. To exercise independent judgement: which is self-explanatory; a director can’t do something only because he is told by someone else to do it, he must himself consider the act a reasonable one.
    
4. To exercise reasonable skill, care, and diligence: that means acting in a way which a person who had that level of general knowledge, skill and experience would act.
    
5. To avoid conflicts of interest: meaning a director cannot put himself in a position where there is, or might be, a conflict between the duties they owe the company and their or someone else’s own interests.
    
6. The duty not to accept benefits from third parties: this is intended to prevent a director from exploiting his position as director for his own personal gain.
    
7. The seventh duty relates only to those companies where there is more than one director and that is the duty to declare to the company if he has an interest in a proposed transaction which the company is planning to make.

Are any of the duties more important than the others?

No, and in practice, a director will find that more than one duty will apply in any given situation, but all duties must be complied with at all times.

What happens if a director breaches a duty?

That depends on the status of the company. All duties are owed to the company itself, so if it remains active, the company can take action against a defaulting director. But if the company is insolvent and a liquidator has been appointed, then the liquidator may investigate the director’s conduct and take legal action against him if the duties have been breached.

What are the consequences of breaching a duty?

That will depend on the nature of the breach. So, if a director has taken company property or money for himself, he can expect to be required to return or repay it.

In cases where there has been a serious breach of duty, a director may be subject of an investigation by the Director’s Disqualification Unit and could be disqualified from acting as a director.

How can a solicitor help?

We can advise directors when they are appointed of their duties and best practice to ensure they follow the rules; or if they are concerned how best to make sure that a particular arrangement or transaction should be carried out.

And, where a director is facing a claim against them by the company or its liquidator, we can help with that and assist in reaching a solution. As with all problems, the sooner we are involved, the more likely it will be that a successful conclusion can be reached. Call our commercial law team today on 0161 696 6170.