A Guide to Directors' duties in the United Kingdom

As a director in the United Kingdom, you have a range of duties to fulfill, which are outlined in the Companies Act 2006. You must act in the best interests of the company and its shareholders.

Directors must also exercise reasonable care, skill, and diligence in their decision-making. This means staying up-to-date with the company's affairs and being aware of any potential risks or issues.

The Companies Act 2006 also requires directors to avoid conflicts of interest. This means not using your position for personal gain or to benefit a third party.

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As a director in the United Kingdom, your role is to participate in board meetings to enable the board to reach decisions and ensure the company meets its statutory obligations. The directors are essentially the agents of the company, appointed by the shareholders to manage the company's day-to-day affairs.

You may also be a shareholder or an employee of the company, but it's essential to draw a distinction between these separate roles and "wear the right hat for the job". The basic rule is that the directors should act together as a board, but the board may also delegate certain powers to individual directors or to a committee of the board.

The law imposes general duties on all directors, regardless of the company they work for or the industry they operate within. These general duties are contained within the Companies Act 2006 and are owed to the company itself, not to the shareholders or other directors.

A company acts through two bodies of people - its shareholders and its board of directors. As a director, your primary responsibility is to ensure the company meets its statutory obligations.

Here are some key general duties of directors:

Remember, if you breach these duties, the company can claim against you.

As a director in the United Kingdom, you have a range of general duties that you must fulfill. These duties are owed to the company itself, not to individual shareholders or other group companies.

Your general duties are not mutually exclusive, meaning more than one duty may apply in any situation. For example, you'll need to apply your duty to act with reasonable care, skill, and diligence when considering whether a course of action is likely to promote the company's success.

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You must exercise reasonable care, skill, and diligence in your duties as a director. This means acting with the same care, skill, and diligence that a reasonably diligent person would exercise in the same circumstances.

The Companies Act 2006 has codified seven individual duties that all directors owe to their company. These duties are:

You may be relieved of liability for a breach of duty if you acted honestly and reasonably. Additionally, the company may offer to assist you by indemnifying you against costs incurred in successfully defending a claim for breach of duties owed to the company.

Here's a summary of your general duties as a director in the UK:

As a director, you have a duty not to accept benefits from third parties given to you because of your position or for doing something as a director. This duty is set out in Section 176 of the Companies Act 2006.

The key point to note is that accepting a benefit from a third party can be seen as likely to give rise to a conflict of interest, unless it's de minimis or unlikely to cause a conflict. For example, a salary paid by a joint venture party to an employee nominated as a director is not caught by this prohibition.

As a director, you must not accept benefits from third parties that could be seen as influencing your decisions. This means being cautious when offered contracts or benefits that could benefit you personally. For instance, if a potential client offers you a contract in your personal capacity after turning it down for your company, you may be in breach of this duty.

There is no statutory mechanism to enable other directors to authorise the acceptance of a benefit, so you must be mindful of this duty and make decisions that align with your role as a director.

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As a director, it's essential to be transparent about any potential conflicts of interest. Directors have a duty to disclose self-dealing, which means they must reveal any personal interests in a proposed contract to the board, so disinterested directors can approve the deal.

This duty applies even if the transaction has already taken place, and failure to disclose can result in a £5,000 fine. Shareholder approval is required for specific transactions with directors or connected persons if the sum exceeds 10% of the company and £5,000, or is over £100,000.

Directors must also avoid situations that create conflicts of interest with the company's interests. If you own a car you wish to sell to your company, for example, this would be a conflict of interest, and you cannot assess the situation objectively.

To mitigate this risk, directors can seek authorisation from other independent directors who have no interest in the situation. If they authorise your action, there is no risk of breaching this duty, provided they have all the necessary information.

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If you're in any way interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. This includes both direct and indirect interests, such as if your brother is selling a piece of land to your business.

You must make this declaration before the transaction is entered into, or as soon as reasonably practicable if it's an existing transaction. There are some exceptions, such as if your interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or if you're unaware of the interest and the other directors are already aware of it.

Here are some specific scenarios where disclosure is required:

By being transparent and disclosing any potential conflicts of interest, directors can ensure they're meeting their duties and avoiding any potential risks.

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Directors in the United Kingdom have a duty to exercise independent judgment, which means they must make decisions based on their own informed view, not just follow the orders of others.

This duty is outlined in Section 173 of the Companies Act, which requires directors to act independently and not be influenced by third parties.

A director cannot agree to vote in a particular way just because an appointing shareholder asks them to, as this would be a failure to exercise independent judgment.

However, the Companies Act allows directors to act in accordance with an agreement entered into by the company that restricts their future discretion, or in a way authorised by the company's constitution.

In joint venture agreements, it's common to specify which matters require board or shareholder approval, and directors can act in accordance with these agreements without breaching their duty to exercise independent judgment.

Directors must also exercise their own independent judgment when evaluating the advice of third parties, such as accountants or consultants, and not simply follow their recommendations.

To fulfill their duty, directors need to develop their own informed view on the company's activities, and not rely on the knowledge or judgment of other directors or experts.

This requires some effort, especially if directors are not already familiar with key aspects of the company's activities, but it's essential to making independent decisions.

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As a director in the United Kingdom, it's essential to be aware of your responsibilities when a company is facing financial difficulties. If a company is insolvent or approaching insolvency, directors must seek independent advice to avoid potential personal liability under insolvency legislation.

The general duty to promote the success of the company is modified in such circumstances, requiring directors to have regard to the interests of creditors. This means directors must remain informed about the company's financial position and balance the interests of creditors against those of members, where they conflict.

In cases of severe financial difficulties, the interests of creditors become paramount, and directors may be ordered by the court to contribute towards the general pool of assets available to creditors. This can include wrongful trading, fraudulent trading, and misfeasance, which can result in personal liability for directors.

Directors of joint venture companies experiencing financial difficulties must be aware of this requirement and take appropriate advice and action, even if it means acting against the interests of the shareholder who nominated them.

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Breach of a general duty can result in a company seeking an injunction or damages.

A breach of a general duty can also lead to a criminal fine, especially if you fail to disclose an interest in an existing transaction or arrangement with the company.

If you make a personal profit from breaching a duty, a court can order you to repay the amount.

You can be ordered to compensate the company for any loss caused by your breach of duty.

Company property taken during a breach of duty must be returned.

A court can issue an injunction to stop you from breaching your duty, such as entering into competition against your company.

The company may end your service contract as a consequence of breaching your duty.

If you find yourself in a situation where you've breached the general duties owed to your company, don't panic - relief may be available. In certain circumstances, the court may grant relief if you acted honestly and reasonably.

The company may also offer assistance by indemnifying you against costs incurred in successfully defending a claim for breach of duties owed to the company. This can be a huge weight off your shoulders, especially if you're facing a costly lawsuit.

You should also check if the company has arranged insurance for the benefit of its directors, as this can provide additional protection. This type of insurance is commonly known as directors' and officers' (D&O) insurance.

Here are some key points to remember about relief and protection:

It's essential to understand that an indemnity from the company can only cover certain costs, such as the cost of the claim itself and the costs involved in defending it. However, it will not cover the costs of an unsuccessful defense or fines imposed in criminal proceedings.

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If you find yourself in a situation where you've breached your general duties as a director, don't worry, there are ways to get back on track.

In certain circumstances, the company's shareholders can ratify your breach by passing a resolution, essentially giving you a clean slate.

The court may also grant relief if you acted honestly and reasonably, which is a big relief for directors who've made an honest mistake.

You can also check if the company has arranged insurance to cover you in case of a breach, which is a great benefit to have.

If the company has offered to indemnify you against costs incurred in defending a claim, be sure to take advantage of this offer.

Here are some possible ways to get relief for a breach of general duties:

Remember, it's always better to seek help and guidance if you're unsure about your duties as a director.

A company may indemnify you in respect of certain proceedings brought against you by third parties, potentially covering both the cost of the claim itself and the costs involved in defending it.

However, this protection does not extend to the unsuccessful defence of or fines imposed in criminal proceedings, or penalties imposed by regulatory bodies.

The company may also take out directors' and officers' (D&O) insurance on behalf of its directors, which typically deals with directors' liabilities arising from claims of negligence, breach of duty or other default.

But, standard policy exclusions include fraud, dishonesty and criminal behaviour, so it's essential to understand any limitations on cover and keep insurance policies under regular review.

Here are some key points to keep in mind:

By being aware of these limitations, you can better understand the scope of protection available to you and take steps to mitigate potential risks.