When you are appointed as a director of a company you become an officer with legal responsibilities.
The Companies Act 2006 sets out a statement of your general duties.
The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.
Being a director of a company
The Companies Act also outlines seven statutory directors' duties as detailed below:
- Duty to act within their powers . As a company director, you must act only in accordance with the company’s constitution.
- Duty to promote the success of the company. You must act in such a way that you feel would be most likely to promote the success of the company for the benefit of its members as a whole.
- Duty to exercise independent judgement. You have an obligation to exercise independent judgement.
- Duty to exercise reasonable care, skill and diligence. You must exercise reasonable care, skill and diligence using your own general knowledge,skill and experience, together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director.
- Duty to avoid conflicts of interest. You must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.
- Duty not to accept benefits from third parties. Building on the idea that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been given because you are a director, or as a consequence of taking, or not taking, a particular action as a director. This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
- Duty to declare interest in a proposed transaction or arrangement. Any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement.
Enforcement and penalties
The Companies Act states that they will be enforced in the same way as the Common Law, although under Company Law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.
Enforcement is via an action against the director for breach of duty.
This action can only be brought by:
the company itself (ie the Board or the members in a general meeting) deciding to commence proceedings
a liquidator when the company is in liquidation
an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.
The law is designed to penalise those who act irresponsibly or incompetently and a director who acts honestly and conscientiously should have nothing to worry about.