Understanding Directors’ Duties: Back to basics

A director plays a key role in the running of a business, governed by the rules of the Companies Act 2006.

Understanding and applying the rules is important for directors. Failing to adhere to the rules can lead to serious consequences.

What are a director’s duties?

Directors’ duties are the legal obligations that come with running a business.

While directors may have their own role within a business, all directors share responsibility for the board’s decisions and actions.

The seven key duties of a director, according to the Companies Act 2006, are:

1. Directors must act within their powers and follow the company’s constitution.
2. Promote the success of the company for the benefit of its members.
3. Exercise independent judgement.
4. Exercise reasonable care, skill and diligence.
5. Avoid any conflicts of interest that may arise.
6. Do not accept any benefits from third parties.
7. Declare any interest in a proposed transaction or agreement.

These duties apply equally to all directors, though the courts may recognise the practical differences in how they operate based on their role and involvement.

For example, managing directors will typically have enhanced obligations for monitoring and oversight than non-executive directors, who will be judged based on their more limited role.

What happens if a director breaches their duties?

Should a director breach their duties, serious personal and financial consequences can ensue depending on the nature of the breach.

First, the company may be able to bring a claim against the director for damages or compensation. The director may be required to repay profits or restore property.

Additionally, shareholders can bring an action against the director on the company’s behalf.

If the breach leads to insolvency, the insolvency service or liquidator can pursue claims under the Insolvency Act 1986.

Should the breach be severe, under the Company Directors Disqualification Act 1986, the director can be prevented from acting as a director for up to 15 years. If the breach involves dishonesty, directors could be criminally prosecuted.

Some examples of breaches include:

• Misusing company assets or funds for personal reasons.
• Paying one creditor in preference of another when insolvent.
• Failing to act in the best interest of the company when insolvent.
• Carrying out duties in a way that will cause harm or loss to the company.
• Allowing an overdrawn directors’ loan account to persist without payment.

If a director breaches their duties, the company, stakeholders, liquidators or the Insolvency Service have the right to take action against the director.

How can we help?

Becoming a director is a huge step in your career. Understanding your duties and what could happen if those duties are breached is imperative to understanding the gravity of the decision to say yes.

Our team are here to support directors when they are leaping, to ensure that directors are acting lawfully.

For support with directors’ duties, get in touch with our team for support.

URL has been copied successfully!