As a director of a company, your role comes with a significant amount of responsibility. The Companies Act 2006 lays down the legal framework that governs the actions of directors in the UK. It sets out the general duties directors must follow to ensure the company is run in a responsible, legal, and ethical manner.
This article will break down these duties in a simple and easy-to-understand way, so you can ensure that you’re meeting the expectations set by the law and keeping your business on the right track.
1. Acting Within Powers (Section 171)
The first and perhaps the most basic duty is to act within your powers. As a director, you’re appointed to manage the company’s affairs in line with its constitutional documents – its articles of association, as well as any rules or policies the company has set.
This means that you cannot make decisions that are outside the scope of your authority or go against the company’s constitution. For example, if the company’s articles specify that certain decisions require shareholder approval, you must seek approval before proceeding.
Similarly, if you’ve been given authority to make certain decisions, you should not overstep your bounds and make decisions beyond your remit.
Your role as a director is to ensure that the company operates within the framework of its own rules and that any decision-making stays within those boundaries. If you go beyond the powers granted to you, you could be personally liable for the consequences.
2. Promoting the Success of the Company (Section 172)
One of your most important duties as a director is to promote the success of the company. This doesn’t mean you should simply focus on your own interests or the interests of a few shareholders – rather, it requires you to act in a way that benefits the company as a whole. The success of the company should be your primary concern, and you need to make decisions with this goal in mind.
When making decisions, you should consider long-term success and sustainability, not just short-term gains. This means taking into account factors such as:
- The likely consequences of your decisions in the long term
- The company’s reputation and the impact on its stakeholders
- The interests of the company’s employees
- The impact on the community and the environment
This duty places a significant responsibility on you to look at the bigger picture when making decisions and ensure that your actions support the company’s growth and development.
3. Exercising Independent Judgement (Section 173)
As a director, it is vital that you exercise independent judgement. This means that you should make decisions based on your own analysis, and not be unduly influenced by others, whether that’s other directors, shareholders, or anyone else.
You must be objective when considering options and always act in the best interests of the company. It’s easy to be swayed by pressure or personal relationships, but your duty is to remain independent and focused on what is best for the business.
This duty also means you should not let personal interests interfere with your decision-making. For example, if you stand to personally benefit from a decision, you need to carefully consider whether it’s in the company’s best interest or if it constitutes a conflict of interest.
4. Exercising Reasonable Care, Skill, and Diligence (Section 174)
You are required to exercise reasonable care, skill, and diligence in your role as a director. This means that you must act with the level of care and attention that can be expected of someone in your position.
What this looks like in practice depends on your experience and knowledge. If you have more experience in a particular area, the law will hold you to a higher standard. For example, if you’re a director of a tech company, you may be expected to have a deeper understanding of the technology and its implications on the business than someone who is a director of a company in a different industry.
If you’re ever in doubt about an issue, it’s your responsibility to seek professional advice. Failing to do so when necessary could be seen as negligence. Simply put, you must take the time to properly assess any decisions and make sure you understand the risks before proceeding.
5. Avoiding Conflicts of Interest (Section 175)
Directors must avoid situations where there is a conflict of interest. A conflict of interest arises when your personal interests (or those of someone closely connected to you) interfere with your ability to make decisions that are in the best interests of the company.
For example, if you are a director of a company that is considering doing business with a company owned by a close family member, this could be a conflict of interest. The Companies Act requires that, in such cases, you must either avoid the conflict or disclose it to the board. In some cases, the board may authorise the conflict, but this must be done in accordance with the company’s rules.
Failure to avoid or disclose conflicts of interest could lead to serious consequences, including legal action and the company potentially losing out on valuable opportunities.
6. Not Accepting Benefits from Third Parties (Section 176)
As a director, you are prohibited from accepting benefits from third parties in exchange for acting in their favour. This includes things like bribes, gifts, or other incentives that could influence your decision-making.
The reason for this rule is to ensure that you act solely in the best interests of the company and not based on any personal gain. For instance, if a supplier offers you a kickback to secure a contract, accepting that benefit would be a clear breach of your duty.
It’s also important to note that this duty extends beyond just monetary benefits – anything that could influence your actions or decisions could be considered a benefit under the Companies Act.
7. Declaring Interests in Proposed or Existing Transactions (Sections 177 and 182)
Directors must declare any interest they have in a proposed or existing transaction with the company. This declaration must be made as soon as possible, and it’s important that you fully disclose any connection that could influence your ability to make impartial decisions.
For example, if you are a director of a company that is planning to enter into a contract with a business that you personally own, you need to declare this interest to the board. Failure to do so can result in legal penalties and can damage the company’s reputation.
The declaration of interests is an important way to maintain transparency and integrity in business decisions. It helps avoid the perception that decisions are being made for personal gain rather than the benefit of the company.
8. Consequences of Breaching Your Duties
Breaching your duties as a director can have serious consequences. If you fail to act in accordance with the Companies Act, the company can take legal action against you. In some cases, you may be personally liable for any financial loss the company suffers as a result of your breach.
The company may seek remedies such as:
- Injunctions: A court order requiring you to stop doing something or to take a specific action.
- Damages: You may be required to compensate the company for any financial losses caused by your actions.
- Restoration of Property: If you’ve misappropriated company property, you may be required to return it.
- Disqualification: You may be banned from acting as a director for a period of time if you are found to be in serious breach of your duties.
In addition to these legal consequences, a breach of your duties can damage the company’s reputation, affect shareholder confidence, and even result in the company’s failure. It is always best to carefully consider your actions to avoid any breaches.
Conclusion
Being a director carries a great deal of responsibility. The duties under the Companies Act 2006 are there to ensure that directors act in the best interests of the company and its stakeholders. By acting within your powers, promoting the company’s success, exercising independent judgement, and avoiding conflicts of interest, you can ensure that you are fulfilling your role in a responsible and ethical manner.
Remember, if you ever find yourself in doubt about a decision or an action, seeking professional advice is always a wise step. By staying informed and diligent, you can protect not only the company but also your own personal interests. The role of a director is crucial, and understanding and fulfilling your duties will help you build a successful, sustainable business.
