Becoming a company director for the first time? Here’s what you need to know

Becoming a company director for the first time is an exciting step, but one that must be taken with caution.

Directors carry a heavy responsibility – running a company involves key decision-making that must take into account the long-term consequences of decisions, the interests of employees, the company’s relationships with its suppliers and customers, and the impact of decisions on the community and the environment.

With corporate social responsibility becoming increasingly important, directors often have to balance what may be conflicting factors in making a decision, such as an environmental consideration that is at odds with shareholders’ interests.

Here’s what you need to know about the role of a company director and what your legal duties are towards the company.

What is a company director?

The director/s run the company on behalf of the shareholders and have a number of legal duties towards the company.

All private limited companies must have at least one director.

The role of the director is defined by case law and confirmed by the Companies Act 2006.

Effectively, a director should always act in good faith and in the interests of the company as a whole by declaring any conflicts of interest and not making personal profits at the expense of the company.

Apart from making business decisions, the directors are responsible for preparing and delivering documents on behalf of the company to Companies House and HM Revenue & Customs (HMRC), such as the company’s accounts and the annual return.

Directors’ duties

Since directors have the power to take important business decisions on behalf of the companies they control, they have duties imposed on them to protect the interest of these companies.

The directors’ duties are designed to ensure that the company comes first. Directors must act in the interests of the company and not in the interests of any other party, including shareholders.

The Companies Act 2006 codifies the seven duties of a director:

1. Promote the success of the company: ‘Success’ is not defined in the Act, but Government guidance suggests that for a commercial company, success would be a long-term increase in value.
2. Avoid conflicts of interest: This duty makes it easier for a director to enter into a transaction with third parties by allowing directors who are not subject to any conflict to authorise the transaction, provided that certain requirements are met.
3. Act within powers: A director must only act in accordance with their powers, which normally originate from the company’s constitution, i.e. its memorandum and articles of association.
4. Do not accept benefits from third parties: This means a director cannot accept a benefit from a third party that arises because they are a director or because they take, or do not take, a particular action as a director.
5. Exercise independent judgment: This duty is not infringed if a director acts in accordance with an agreement entered into by the company or in a way that is authorised by the company’s constitution.
6. Declare an interest in a proposed transaction or arrangement: When a director has a direct or indirect interest in a proposed transaction, they must disclose the nature and the extent of this interest to the board, before the company enters into the transaction.
7. Exercise reasonable care, skill and diligence: Directors must exercise reasonable care, skill and diligence using the general knowledge, skill and experience reasonably expected of a person carrying out a director’s functions (the “objective” standard) and their own general knowledge, skill experience (the “subjective” standard). The effect of the subjective test is that a director who has more experience, knowledge and skill must use a level of diligence in carrying out their duties that reflects their more advanced expertise.

Company secretaries

A private UK company is not required to have a company secretary but can appoint one if it chooses.

If a company has a secretary, the directors will usually delegate the responsibility of sending up-to-date information to Companies House to them. However, the ultimate responsibility for delivering the required documents remains with the company’s directors.

Who can be a director?

Running a company comes with many legal responsibilities – and the consequences of failing to meet them could be disastrous for both you and the company.

At Hethertons, our company and commercial solicitors can help you understand your duties as director, provide company secretarial services, and ensure you remain compliant with the law.

For help with all aspects of company governance, contact our company and commercial law specialists today for expert advice.

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