Duties of a Director

As well as the responsibilities involved in the role of director there are a series of general duties that should be carried out. Though not an exhaustive list, here we consider some of the main duties as a director of your limited company.

Primary Duty

The director(s) main duty is to the company (in effect, the shareholders as a whole) rather than to individual shareholders. In addition a director owes a number of fiduciary duties to the company. In summary this means that a director must act in good faith, honestly and in the best interests of the company at all times.

Duty to act within powers

A director must act in accordance with the company’s constitution (i.e. the
company's articles, decisions taken in accordance with the articles and other
decisions taken by the members if they can be regarded as the decisions of the
company) and must only exercise this power for their proper purpose.

Duty to promote the success of the company

A director must act in good faith in the way that would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so they must have a regard to various factors set out in the Companies Act 2006 predominantly the:

  • Likely consequences of any decision in the long term.
  • Interests of the company's employees.
  • Need to foster the company's business relationships with suppliers, customers and others.
  • Impact of the company’s operations on the community and the environment.
  • Desirability of the company maintaining a reputation for high standards of business conduct.
  • Need to act fairly as between the members of the company.

This is not an exhaustive list and the directors should also consider any other relevant
matters.

Duty to exercise independent judgment

The key point of this duty is that directors should not be swayed by the views of the other directors or allow themselves to be affected by outside interests, but should make decisions independently based on their own appreciation of the benefits and risks that may be involved. They can of course seek professional or other outside advice, but the ultimate decision must be theirs.

Duty to exercise reasonable care, skill and diligence

A director must exercise care, skill and diligence in carrying out their duties. The standard required is in reference to the knowledge, skill and experience a director may be expected to have as a reasonably diligent person. Regard will also be made to the functions of the particular director, including their specific responsibilities and the circumstances of the company.

Duty to avoid conflicts of interest

A director must avoid situations in which they have, or can have, a direct or indirect interest that conflicts with or may conflict with the company's interests. The duty is not infringed if the matter is authorised by the director(s). Such director authorisation may only be given in a private company where the constitution does not invalidate the authorisation.

The above applies where the situation giving rise to the conflict occurs on or after 1st October 2008; the law that applied before that date will continue to apply to situations that occur before 1st October 2008 i.e. conflicts must be authorised by shareholder approval rather than by director approval. It should also be noted that the where a company was incorporated before 1st October 2008 directors are only able to authorise conflicts the members have resolved (before, on or after 1st October 2008) so that authorisation may be given by directors.

Duty not to accept benefits from third parties

A director must not accept any benefit from a third party which is conferred due to them being a director, or them doing or not doing anything in their role as a director.

Duty to Creditors

The director(s) of a solvent company i.e. one that is able to pay its debts as and when they fall due, do not generally have to consider the interests of creditors. However, the director(s) of an insolvent or near insolvent company do have to consider both the financial position of the company and the best method of maximising a return for the creditors.

Duty to Employees

Directors are required by law to have regarded, in general, the interests of the company's employees (if there are any).

Duty to Shareholders

Directors do not owe any direct duty to the individual members of a company, but only to the company itself i.e. to all of the company's members together.

Other Duties

Directors are also responsible for ensuring that the company complies with all other relevant legislation relating to employees and business premises such as Health and Safety at Work.

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