Company directors owe duties to the company under the Companies Act 2006. In this article, we explain what those duties are and how they change when a company is in financial difficulty.
Directors have significant authority to shape the direction of a company, but that authority also comes with significant duties and responsibilities.
Here we outline what those duties and responsibilities are and how they should shape your decision-making.
What are directors’ duties?
Director’s duties are a series of legal obligations which set out expectations on how directors should exercise their powers, and for whose benefit.
These duties typically apply to both executive directors and non-executive directors, but they may also apply to those who have not been formally appointed as a director but have equivalent levels of influence on a company, such as de facto directors and shadow directors.
The seven statutory duties of a director
Under the Companies Act 2006, a director has seven statutory duties. Each director owes these duties to the company rather than to shareholders or other stakeholders in the company, and they are as follows:
Duty to act within powers
Directors must act in accordance with the company’s articles of association and other elements of its constitution. The make up of these documents may affect the director’s decision-making powers.
Duty to promote the success of the company
Directors must act in a way that gives the company (and its shareholders) the best chance of being successful. This isn’t only about maximising profits; it also means that directors must factor in the long-term consequences of their decisions and promote the company’s interests above their own.
Duty to exercise independent judgement
Directors are expected to form their own, independent opinions and not be swayed in their decision making by the influence of others.
Duty to exercise reasonable care, skills and diligence
The expectations of a director in this respect vary based on the circumstances – directors who are professionally trained will have more expected of them.
Duty to avoid conflicts of interest
All directors are obligated to avoid situations where they may have an interest that conflicts with the company’s best interests. For example, directors must not exploit company assets or use their position for personal gain.
Duty to not accept benefits from third parties
Directors may not accept benefits provided by any third party due to their role as a director or due to their actions (or inactions).
Duty to declare interest in proposed or existing transactions or arrangements
Directors must declare any interest, direct or indirect, that they have in any existing or proposed transaction of the company.
Directors' responsibilities beyond their statutory duties
The statutory duties of a director are some of their key legal duties, but this role is also responsible for:
Ensuring that adequate company records are maintained
Filing the company's accounts and annual confirmation statement
Reporting company changes
Recording share allocations and cap tables
Various other regulatory responsibilities such as employment, health and safety and anti-bribery and corruption obligations.
Directors’ duties in companies facing insolvency
The duties of a director changes when a company is at risk of or bordering on insolvency.
In such a case, a director will instead owe their duties to the creditors, or potential creditors, of a company. In practice, this means that they must maximise the assets of the company in favour of the creditors, rather than liquidate them to provide more value to shareholders.
Directors in this situation who do not act correctly can find themselves at risk of claims for:
Wrongful trading: this is where a company continues to trade despite its directors knowing, or where they should have known, that there was no realistic prospect of avoiding insolvency or liquidation.
Fraudulent trading: this is similar to wrongful trading but occurs when directors continue trading with the express intention of defrauding their creditors.
Misfeasance: this may involve misusing company funds or assets.
This shift in duties can be tricky to navigate, and we recommend that directors in a company facing insolvency take independent legal advice at the earliest opportunity.
Read more about the shift from duties to shareholders to creditors.
A claim by a liquidator of administrator of an insolvent company seeking repayment of company funds or a contribution to the company’s assets, and/or director disqualification is a risk if this situation is not handled correctly.
Personal liability of directors
Directors can face personal liability for their actions or inactions, particularly where the company is at risk of insolvency. While a company is a distinct legal entity, meaning usually only the company is liable for its contractual obligations, in some circumstances, liability can fall on the directors.
Some of the key scenarios in which a director can become personally liable include:
Where a director does not act in accordance with their statutory duties
In an insolvency scenario, where a director fails to act in the interest of the company’s creditors (see above)
Where a director has signed a personal guarantee
If they commit a criminal offence, including acting while disqualified.
Consequences of a breach of director duties
Directors who breach their statutory duties can face serious consequences, such as:
Liability to the company for any financial losses
Criminal prosecution and fines
Liability to creditors
Shareholder claims
On rare occasions, liability to third parties
If you need guidance or support on fulfilling your director duties, or are under investigation for a suspected breach of your duties, contact our director disqualification solicitors.
