Directors' responsibilities and duties

What duties and responsibilities does a director have? What is the definition of 'director'?

This is a freeview 'At a glance' guide to directors' duties and responsibilities.

At a glance

Directors' responsibilities and duties are legally framed in three ways:

By common law.
By the company’s constitution also known as its Articles of Association.
By statute.

Those common law duties that have become statute are outlined in the Companies Act 2006.

Directors’ duties apply not only to executive and non-executive 'de jure' directors but also to 'shadow', 'de facto' and 'nominee' directors.

Overview

The legal responsibilities and duties to which all directors must adhere are determined by common law, the Companies Act 2006 and by the specific constitution of the company.

These obligations apply to all types of directors. Together with executive and non-executive directors, who are formally appointed within the company’s constitution and who are registered with the registrar of companies, also known as 'de jure' directors, are other types of directors who must abide by the regulations. These include:

'Shadow' directors: any unregistered director who cannot implement actions directly, but whose instructions the board will execute.
'De facto' directors: any director who, although not formally appointed, has the decision-making power of a director, who can sign company documents and who is considered a director by other board members.
'Nominee' directors: those directors appointed by a shareholder(s) to represent their interests. Although nominee directors will give weight to their nominator’s position, the good of the company takes precedence. A nominee director can also be a 'de jure' or 'de facto' director.

Common law duties

There are a number of directors’ duties, which although not codified by statute, have been identified in a court of law as a duty. The more widely recognised common law duties, also known as fiduciary duties, state that directors must:

Exercise reasonable care and skill in the performance of their role as a director.
Put the well-being of the company first and not exercise their power for personal profit.
Not exceed the powers conferred on them by the articles of the company nor exceed the company’s objectives.
Not put the interests of the shareholders above those of the creditors if insolvency becomes apparent.
Not sell company assets to protect jobs to the detriment of creditors if the company were to go into liquidation.

Case law

In the case of Power Adhesives Limited v Stephen James Sweeney & Others, the Court set aside the decision by a company’s directors to convert a loan into shares because it amounted to a breach of the directors’ fiduciary or common law duties under the Hastings-Bass principle. The court said that:

It was obvious that the directors did not understand the effect the share issue would have and if they had they would not have approved it.
The board failed to take into account relevant considerations such as the massive dilution of the shares and the tax consequences.
Involving the company’s advisers did not mean the directors had fulfilled their fiduciary duties.

In TMO Renewables Ltd (in liquidation) v Yeo [2021] EWHC 2033 an issue of shares that was originally found to be legitimate became a breach of directors’ duties. A legitimate concern about proposed company fundraising turned into a wish by the directors to maintain control of the company which they did by approving the issue of new shares. This was found to be a breach of their legal duties as directors.

Companies Act 2006

Those responsibilities and duties that have been codified by statute in the form of the Companies Act 2006, as set out in sections 171 to 177 are:

To act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred.
To promote the success of the company.
To exercise independent judgment.
To exercise reasonable care, skill and diligence.
To avoid conflicts of interest.
Not to accept benefits from third parties.
To declare an interest in a proposed transaction or arrangement.

Each section, as outlined above, contains any number of subsections and paragraphs that help to clarify the duties.

Along with sections 171 to 176, which have a direct reference to company directors and their behaviour in regard to the management of the company, directors must also ensure that the company complies with all other aspects of company law as described in the Companies Act 2006.

Breach of duty

Directors in breach of their duties may be required to return any property wrongly taken from the company, or pay damages.
Shareholders have the right, under the Companies Act, to bring proceedings against a director in respect of any alleged negligence, breach of duty or breach of trust.
In some circumstances, directors can be held personally liable for company debts, for example in respect of wrongful trading, acting in breach of disqualification orders or in respect of Unpaid tax debts.

Accounts and reports

Overseeing company accounts falls to a company 'officer'. In large publicly owned firms, the administrative officer is likely to be the company secretary. In small private companies, that are not legally obliged to appoint a company secretary, a director may have to assume the role of ensuring that the company complies with all the accounting requirements as described in Chapter 15 of the Companies Act 2006. The principal accounting tasks include:

Filing returns (annual reports and accounts) with the Registrar of Companies on the correct date.
Signing a declaration of and filing accounts with Companies House.
Holding an AGM if the company has traded shares.
Ensuring that all taxes, including VAT and NICs, are paid on time.
Ensuring the name, registered address, and number are included on all company stationery.

Employment law

Directors are also responsible for ensuring compliance with all areas of employment law. Employment law covers a broad range of employment-related issues such as:

Discrimination, including sex, age, race, and religion.
Equal pay.
Bullying and harassment.
Dismissal and disciplinary procedures.
Health and safety.
Employment terms and conditions.

Failure to comply with any area of employment law may result in legal action taken against the company and the director personally.

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