Starting a limited company is a big step in your business journey. It brings new responsibilities beyond the daily operations. As a director, the Companies Act 2006 guides your obligations, ensuring you lead with the company's values for success.
Even if you delegate tasks, the legal responsibility for your company's performance is on the directors. Let's look at the key duties of a company director.
Navigating statutory obligations and compliance
As a director, you must perform a set of 7 duties under the Companies Act 2006:
1. Company’s constitution
The first statutory duty of a company director is
“...that a director must act within their powers under the company’s constitution. The most important part of the company’s constitution is the articles of association. These are an important set of rules for your company and for your board.”
This means directors must stick to the company's rules about how it should be run. If they don’t, they could end up making decisions they’re not allowed to make, and if that happens, those decisions might be cancelled or reversed.
So, it's crucial to know and understand the rules in the company's constitution, especially the articles of association, to make sure you're making decisions within the boundaries set by those rules.
2. Promote the success of the company
“You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”
In this context, “success” means making sure the company grows in value over time. Each director must decide, in good faith, if a certain action is right for the company. To promote the company's success, directors must think about:
- The likely results of decisions in the long term.
- The interests of the company's employees.
- Building good relationships with suppliers, customers, and others.
- The impact of the company on the community and the environment.
- Maintaining a good reputation for business conduct.
- Treating members of the company fairly.
This list isn't everything, but it highlights important areas for responsible business behaviour. Directors shouldn't just use this as a tick box exercise — they need to think about them seriously.
3. Independent judgement
“Directors are meant to develop their own informed view on the company’s activities.”
While you can seek advice from others, directors must make decisions based on their own judgement, not the influence of others.
4. Exercise reasonable care, skill and diligence
“You must perform to the best of your ability. The more qualified or experienced you are, the greater the standard expected of you.”
Almost anyone over 16 can become a company director, as long as they're not disqualified or bankrupt. You don't need specific qualifications or experience.
Even though there's no formal checklist, being a director means taking on a big responsibility. The law expects directors to be reasonably careful and skilled in their role. People are different, so every director will bring their own strengths. But, overall, it's expected that anyone becoming a director can handle the job reasonably well.
5. Avoid conflicts of interest
“If situations arise which impose multiple claims on a director’s attention or loyalty, it is essential that they disclose them to fellow board members.”
This rule is all about how you use things like property, information, or opportunities if the company could benefit from them. You should:
- Avoid loyalty conflicts: Make sure you don't get into situations where your loyalties are divided.
- Be open about conflicts: If you see a possible conflict of interest, you should let other directors and members know about it. Follow any process mentioned in the company’s rules (articles of association).
- Beyond directorship: Even if you're not a director anymore, you still have to stick to this rule. You must not try to benefit from any property, information, or opportunity you got to know about when you were a director.
Here are just some example situations that might cause conflict of interest:
- Being on multiple boards: If you're on the board of a big shareholder, the pension trustee, a competitor, or a company the business buys from or sells to.
- Having personal interests: This could be if you own a lot of the company's shares, or if you're a competitor, customer, or supplier.
- Advisory roles: If you're also an advisor, like an accountant or consultant, to the company or a rival.
- Connected people: If any of the above situations apply to someone connected to you, like a spouse, partner, parent, friend, or close family member.
If there are potential conflicts of interest, the first step is to inform the other directors (if there are any). If there might be a conflict of interest, the board can give the green light, as long as it follows the company's rules. If the board can't decide, then it's up to the shareholders.
6. Third party benefits
“You must not accept benefits from a third party that are offered to you because you’re a director. This could cause a conflict of interest…you may accept benefits like reasonable corporate hospitality, if it’s clear there’s no conflict of interest.”
Directors need to be careful not to accept gifts or benefits from others just because they're in charge or because of what they could do (or not do) as a result of their role. Doing so can be misinterpreted and lead people to question their integrity. It's best to avoid anything that could make things seem improper.
7. Interests in a transaction
“You must tell the other directors and members if you might personally benefit from a transaction the company makes. For example, if the company plans to enter a contract with a business owned by a member of your family.”
If you're involved, either directly or indirectly, in a deal or agreement with the company, you need to let the other directors know about it. For example, if your company is going to use a marketing agency owned by your friend.
If it's a new deal, tell them before it happens. If it's a deal that's already going on, let them know as soon as you can.
Other directorial responsibilities
As well as the Companies Act, directors and their companies may need to adhere to a range of additional legislation and regulations, including (but not limited to):
- Health and safety laws
- Employment law
- Equality law
- Consumer rights
- Trade descriptions
- Competition law
- General Data Protection Regulation (GDPR)
Ensuring financial stewardship and stakeholder management
Directors must oversee financial performance, ensuring transparency in reporting and communicating financial information to stakeholders.
In accordance with UK company law, directors are also legally obligated to manage various filing and reporting responsibilities for their limited company. These responsibilities encompass, among other things:
- Registering for corporation tax
- Registering for VAT
- Registering for Pay As You Earn (PAYE)
- Preparing annual accounts and tax returns for HMRC
- Paying company taxes on time
Navigating risk management and strategic decision-making
Managing risks is crucial for safeguarding a company's assets and reputation. Directors must identify, assess, and mitigate potential risks, aligning strategic decisions with long-term goals.
Embracing ethical conduct and responsible leadership
Maintaining ethical conduct is paramount. Directors play a vital role in fostering a culture of ethical behaviour within the organisation, upholding corporate social responsibility.
If the company enters insolvency, director responsibilities change. During insolvency, directors don’t report to shareholders or members. They now report to the creditors (the people the company owes money to) and must prioritise their interests.
If you’re the director of a business in insolvency, the first step is making sure the company stops doing business right away. If you keep going, you might end up on the hook for the debts the company racks up during that time.
What happens if I don't uphold my director duties?
Being a director is serious business, and neglecting duties can lead to legal action and fines. The Companies Act 2006 is legally binding, and failure to uphold duties can result in legal consequences. Directors' and Officers' insurance exists to cover legal defence and compensation claims, except for intentionally fraudulent or criminal conduct.
The bottom line
Starting a limited company is a big step, and being a director comes with important responsibilities outlined in the Companies Act 2006. From following the company's constitution to promoting its success, exercising independent judgement, and avoiding conflicts of interest, directors play a crucial role in responsible business behaviour.
Beyond this, directors handle financial matters, manage risks, make ethical decisions, and, if necessary, navigate insolvency responsibly
Neglecting these duties can lead to consequences. So, remember, being a director is more than day-to-day tasks; it's about steering the company responsibly and ethically for long-term success.
This post does not constitute financial advice. For funding advice, please contact your financial advisor or accountant.