Duties of company directors

1 July 2022

The Companies Act 2006 sets out what the duties of company directors are and it is useful to review these seven duties to ensure that directors are aware of their responsibilities.  But before that, let’s look at the Act’s definition of what a director is.  The definition of a director covers four areas:

• An executive director properly appointed by the company;
• A non-executive director properly appointed by the company;
• A de facto director.  That is someone who assumes the status and functions of a director even though they are not properly appointed, they may appear to have been by an outsider;
• Shadow directors.  This is a person whom the properly appointed directors of the company take directions and instructions from.

The seven duties of a director, the first four of which are already in place are:

1. General duty of a director to act within powers

Company directors must act within the powers given to them by way of the company’s constitution and must “only these powers for the purchase for which they are conferred”.

2. A director has a duty to promote the success of the company.

This is in a way that is for the benefit of the company and its members as a whole.  Decisions must have regard as to the likely long term consequences on the following:

• The company’s employees
• The business relationships with suppliers, customers and others
• The company’s impact on the environment
• The company maintaining a reputation for high standards of business conduct
• The need to act fairly between the members of the company

The above will change if

3. A director has a duty to exercise independent judgement

A company director must exercise powers independently without subordinating power to the will of others.  That is unless it is by way of the company’s constitution or as a result of an agreement duly entered into by the company that restricts the future exercise of discretion by its directors.

4. A director has a duty to exercise reasonable care, skill and diligence

That is the same level of care, skill and diligence as may reasonably be expected by any other person acting in the same position (an objective test) or the general knowledge, skill and experience that the director actually has ( a subjective test).

5. A director has a duty to avoid conflicts of interest

If a conflict of interest potentially exists, it must be authorised by all the directors as long as there is nothing in the constitution which invalidates the authorisation. 

6. A director has a duty not to accept benefits from third parties

This does not mean that normal business entertaining cannot be accepted.  There may however be a case for looking at the wealth of a director to decide a conflict of interest could arise.

7. A director has a duty to declare an interest in a proposed transaction

This must be disclosed to the other directors of the company before the transaction is entered into.

Same Day Company Services can assist you with incorporating a company.  We also offer the use of our London address as the service address for the director. Please get in touch if there is anything we can help you with.