When setting up a limited company, there are several duties you must be aware of as a company director.
After all, a limited company is a separate legal entity from its directors. This means that there is a number of rules and duties the director must follow as outlined by The Companies Act 2006.
If a director breaks any of these rules, there are some negative consequences they can face. Therefore, it’s crucial that the director understands what duties they hold.
To help, Clarke Bell has put together this handy guide on directors duties to know about in 2021.
What is a company director?
Before we take a closer look at directors duties in 2021, let’s start by explaining what a company director is.
Every limited company has to have at least 1 director but can have more if they wish.
As well as being responsible for running the company, the director also has a number of other duties.
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Director’s duties to know about
1. The company’s constitution
There are seven key director’s duties to know about, the first refers to the company’s constitution.
This duty states that the director has to act within their powers as laid out in the company’s constitution.
The most integral part of the company’s constitution is the company’s articles of association. These are the rules the directors have laid out for the company and board which define your powers as a director.
Directors have a duty to act within the powers laid out, must use their directorship for the intended purpose and must not act for personal benefit.
The company’s articles are written when the company is registered. Directors can write their own company articles or can alternatively use the model articles which are made available to all companies when incorporating the company.
Directors have a duty to be familiar with the company’s articles and not exceed the powers laid out in the articles.
2. Promote the success of the company
The next director’s duty to be aware of is to promote the success of the company.
This means that directors must act in a way that promotes the success of the company as a whole.
When the director is making a decision, they must think about the consequences on the whole business, including on shareholders, stakeholders, employees, customers and suppliers.
The director must also think about the impact of their decisions on the environment, both on a local level and on a wider basis.
As part of this duty, the director must also consider the company’s reputation and success in the long term.
Although this may seem like an obvious duty, it has a number of ramifications for the director. After all, board decisions can only be discussed in the context of what is best for the company as a whole, and not for just any one individual.
3. Exercise independent judgement
The next director’s duty is to exercise independent judgement.
Here, directors are expected to develop their own informed views on the company’s activities. This means that the director should exercise independent thought and not be influenced by particular individuals or groups.
4. Practice care, skill and diligence
The next director’s duty is to exercise reasonable care, skill and diligence. This relates to the director’s individual skillset and experience, as well as skills that can be reasonably expected of a person in a director’s position.
This means that the director must exercise the skill, care and diligence that any other director of a similar company would. It also means that if the director has a particular set of skills, say because they are a chartered engineer, then they must meet a higher standard because of this.
5. Avoid conflict of interest
Another director’s duty to be aware of is the need for directors to avoid conflict of interest which might impact their objectivity.
This refers to any situation that might arise in which there are several claims to the director’s loyalty.
Here, the director must disclose the conflict of interest to other board members. Other board members must then decide how to manage the conflict to maintain the integrity of the board’s decision-making process.
6. Don’t accept third-party benefits
The penultimate director’s duty is that the director should not accept any benefits from third parties because of their role.
7. Declare any interest in a proposed transaction or arrangement
The final director’s duty to be aware of is that directors must declare the nature of their interest in a proposed transaction or an existing transaction, whether that is either a direct or indirect interest.
The purpose of this duty is to ensure the board is completely aware of the director’s interest in a transaction before it is completed.
What if a director’s duties are breached?
There are a number of consequences for the director if they breach their duties. Although it is typically the company itself that takes action again the director, it can be the case that one or more shareholders can make a claim against the director if they have experienced personal financial loss or damage.
These can include:
- Being removed from office. This can occur if more than half of the shareholders vote for this measure and can be on a permanent or temporary basis
- Setting transactions aside
- Restoring company property
If your company is facing financial difficulties, it is crucial that directors act correctly and always fulfill their director’s duties.
At the first signs of financial trouble, directors should seek the advice of an Insolvency Practitioner.
At Clarke Bell, our team of licenced insolvency practitioners can help steer your business through financial distress.
That might mean helping you to perform your directors duties by restructuring the company or to end your director duties through either a Members Voluntary Liquidation (MVL) or a Creditors Voluntary Liquidation (CVL).
Of course, every situation is different and there are many more options available.
Let Clarke Bell help
That’s where Clarke Bell can help. Whatever your situation, if you’d like to talk to one of our friendly team members to see how we can help you, simply get in touch today.