Directors Statutory Duties – Companies Act 2006

Today’s post comes from Aimee Marsh, who graduated from the UEA Law School in 2005, and works for Norfolk solicitors Metcalfe Copeman & Pettefar LLP who offer legal advice and guidance covering a wide range of business issues. Aimee can be contacted on 01842 756139 or aimee.marsh@mcp-law.co.uk

Directors Statutory Duties

When you are starting out in business, you might be advised to operate your business as a separate limited company for various reasons. You will probably be keen to benefit from limited personal liability and perhaps there may be some tax advantage.

What some people fail to realise is that their company is a separate legal entity. It may not have a personality, but it certainly has its own identity and existence. As a director, you owe your company various duties. There are a number of statutory duties set out in the Companies Act 2006. The consequences of breaching your duties can be extremely serious – you could be sued personally (for example for any unlawful profits made) or even commit a criminal offence.

It is important to note that the Companies Act 2006 does not provide a complete list of directors duties; it was designed to consolidate existing case law. There are a wide range of other duties with which directors must comply which are beyond the scope of this article, for example health and safety legislation; directors can be personally liable (and face criminal prosecution) if they fail to uphold these standards.

By way of summary, under the Companies Act 2006 directors must:

  • act within their powers;
  • promote the success of the company;
  • exercise independent judgment;
  • exercise reasonable care, skill and diligence;
  • avoid conflicts of interest;
  • not accept benefits from third parties;
  • declare interests in proposed transactions.
  • It is not possible to explain and consider each of the duties in depth in this article but the following points are worth noting:

    Promoting the company’s success

    The Companies Act 2006 sets out that promoting the success of the Company should involve having regard to:

  • interests of employees,
  • consequences of decisions in the long term,
  • the need to foster business relations,
  • the need to act fairly between shareholders,
  • maintaining a reputation for high standards of business conduct,
  • impact on the community and the environment.
  • There is also a need to consider creditors of the Company in certain circumstances which will generally come into play if the company becomes insolvent and unable to pay its debts.

    It is important for directors to make a note that they have properly considered matters, especially when taking more important decisions for the company. It will always be a matter of discretion and balance, but decisions and reasons should always be recorded (and then kept for ten years in line with the Companies Act 2006). It may add to administration, but it is a legal requirement and in addition it will be much easier for a director to successfully defend a decision they have taken (if later challenged) if they have the paperwork to show why they chose a particular course of action.

    Reasonable care, skill and diligence

    The Companies Act 2006 provides that “reasonable care, skill and diligence”, means the care, skill and diligence that would be exercised by a reasonably diligent person with the knowledge skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge skill and experience that the director has. There are therefore objective and subjective elements. For example, if the director is a qualified accountant, his duty towards the company on accounting matters will be very high!

    Conflicts of interest and declarations of interest

    The Companies Act 2006 makes it clear that directors should not take advantage of opportunities personally where the company could benefit from those opportunities. There are any number of different circumstances that could apply, so each one must be looked at individually. If there is the possibility that the directors and the company’s interests conflict (or the possibility that someone else could interpret that a conflict exists), then you should seek legal advice. In a lot of cases it will be obvious but sometimes the interests may be harder to unpick and the mistaken opinion of a third party (eg a major shareholder) could be disastrous.

    If there is a conflict of interest between a director and the company, other directors may be able to authorise the matter to proceed, but a resolution of the shareholders may also be needed depending on the Company’s constitution.

    If a director’s personal interests conflict with the company on a particular matter then the director will need to explain the nature and extent of their interest to the company. The director must give enough details for the other directors to make a proper judgment. Such declarations can be made in meetings (and recorded in the minutes of the meeting), in writing or general notice subject to requirements of the Companies Act 2006. If not declared before the transaction is entered into, there is a further duty on directors to declare interests in existing transactions or arrangements. Failure to do that is a criminal offence.

    Above all, the Companies Act 2006 is designed to encourage directors to act honestly and in good faith towards their company. The minutes of all meetings of directors at which material decisions relating to the company are made should record the fact that these duties have been discharged with knowledge of the statutory obligations. If you are in doubt as to what your duties are as a director, you should seek legal guidance.

    Please note that the above is a summary only and is not a comprehensive or complete statement of the applicable law. There is other legislation and requirements which is not set out here. Legal advice specific to your circumstances should be sought.

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