Last Updated on 9.1.24 by Megan Hutton
Many people enter into the role of Director without actually knowing the obligations and duties that accompany this role and the implications that can occur should these duties not be adhered to.
The duties of a director are governed by Chapter 2 of the Companies Act 2006. The main duties are specifically set out in Section 171 to Section 177 of the 2006 Act.
This article will discuss the duties of a director and will give you a brief outline that should clarify those duties. However, we would advise you to review Chapter 2 of the 2006 Act for you to fully understand and appreciate the duties that will be imposed on you should you act as a director.
Section 171: Duty to act within powers:
It is vital that during your time as a director, you always act within your company’s constitution and only exercise powers for the purposes for which they were granted.
The company’s articles of association should set out the majority of your powers and restrictions as a director.
Section 172: Duty to promote the success of the company:
As a director, you must always act in good faith and in a manner which will promote the success of the company. This is mainly to benefit the company’s members, however, pursuant to subsection 3 of this section, a director must also act in the interest of the company’s creditors.
When acting in your role, you should always consider:-
- the likely long-term consequences of any decision;
- the interests of company employees;
- the company’s business relationships with suppliers and customers;
- the impact of the company’s activities on the community and the environment;
- the importance of maintaining a reputation for high standards of business conduct; and
- the need to act fairly between members of the company.
You should always be able to demonstrate that the above was considered, although, the list is non-exhaustive.
In the event that a director does not act in accordance with this section, there can be serious repercussions, such as the director being removed from their position. Examples of actions that would breach this duty would be taking out a vehicle and paying it through the company in the incorrect manner or making payments to benefit yourself and not your members.
Section 173: Duty to exercise independent judgment:
You must always make decisions based on your own judgment in your role as a director and not be swayed by others, like a majority shareholder.
However, you are not violating this duty if you follow an agreement that the company has legitimately made. Such an agreement might restrict the way directors make decisions later on. Also, it is ok to act in a way that is permitted by the company’s constitution.
Section 174: Duty to exercise reasonable care, skill and diligence:
A director is expected to perform their duties with the care, skill, and attention that a diligent person would use in the same role. The standard of ‘diligence’ you’re compared to as a director depends on your own knowledge, skills, and experience. For example, if you have qualifications in accounting and years of experience, you’re expected to fulfil your duties at that higher level of expertise, as that is the standard you’ll be measured against.
Section 175: Duty to avoid conflicts of interest:
As a director, you must avoid any situation where your personal interests might conflict, or seem to conflict, with those of the company. This includes using company information, opportunities, or property for your own benefit.
However, there are exceptions. For instance, if the situation isn’t likely to lead to a conflict of interest, or if the other directors of your company have approved it, and the company’s constitution allows for this kind of approval.
Section 176: Duty not to accept benefits from third parties:
As a director, you cannot accept any benefits given to you by someone outside the company. This applies to gifts or advantages offered because of your position as a director or because of something you did or did not do in that role.
In this context, a ‘third party’ means anyone other than the company, a related company, or someone acting for the company or a related company. If you, as a director, receive benefits from a person or organisation that provides your services to the company (whether as a director or in another role), these benefits are not considered to be from a third party.
However, this duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Section 177: Duty to declare interest in proposed transaction or arrangement:
If you, as a director of a company, are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. For example, if you were a shareholder in another company with whom your company is proposing to enter into a transaction with.
Should you need to declare an interest to your fellow directors, we would suggest arranging a meeting of the directors and giving notice of such meeting, pursuant to Section 184 (notice in writing) or Section 185 (general notice).
Company accounts duties:
Besides the duties already mentioned, you have the responsibility to make sure the company keeps detailed and correct financial records. This involves preparing a balance sheet and a profit and loss statement for each financial period. These documents must be shown to the shareholders.
You are also responsible for making sure these accounts are submitted to Companies House on time. Before you sign off on these accounts to be filed at Companies House, it’s crucial that you fully understand and agree with the information they contain.
If you or the company don’t meet the required legal duties, you might face penalties. Not only could you lose your role as a director for breaking these duties, but you might also be banned from being a director for up to 15 years. However, you could defend yourself by showing that someone with your knowledge and skills would reasonably think all legal requirements were met.
We know that the responsibilities of a director can be overwhelming and unclear sometimes. If you need to talk about your duties, or if you’re facing allegations of not fulfilling them properly, please feel free to reach out to us for guidance.
Call us on 0161 930 5151, email us at Enquiries@gorvins.com or fill in the online form.