22/08/11

By Neil Lancaster, a partner at Midlands-based accountants and business adviser firm Adams Moore, www.adamsmoore.com

The position of director brings both rewards and responsibilities upon an individual.

Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement.

However the office of director should not be accepted lightly. Here, I outline the duties and responsibilities of being a director.

A limited company can be a private or public company - and a public company must include 'public' or 'plc' in its name and can offer shares to the public. Company directors must be aware of all the responsibilities this role entails, however, the responsibilities and penalties for non-compliance of duties are more onerous if you are a director of a public company.

When you are appointed a director of a company you become an officer with extensive legal responsibilities. The Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time.

The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.

The Act outlines seven new statutory directors' duties, as detailed below.

Duty to act within their powers

As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.

Duty to promote the success of the company

You must act in such a way that you feel would be most likely to promote the success of the company (i.e. its long-term increase in value), for the benefit of its members as a whole. However, you must also consider a number of other factors, including:

The likely long-term consequences of any decision

The interests of company employees

Fostering the company's business relationships with suppliers, customers and others

The impact of operations on the community and environment

Maintaining a reputation for high standards of business conduct

The need to act fairly as between members of the company.

Duty to exercise independent judgement

You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence
This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.

Duty to avoid conflicts of interest

This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.

This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.

Duty not to accept benefits from third parties

Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.

This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty to declare interest in a proposed transaction or arrangement

There was an existing requirement for directors to disclose an interest in a proposed transaction. The new duty under the Companies Act 2006 extends this further and requires that any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the 'nature and extent' of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.

The requirement to make a disclosure also applies where directors 'ought reasonably to be aware' of any such conflicting interest.

However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or 'ought reasonably to be aware') of the interest.

Enforcement and Penalties

Although the common law duties have been extended and incorporated into Company Law, the Act states that they will be enforced in the same way as the common law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.

Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:

The company itself (i.e. the Board or the members in general meeting) deciding to commence proceedings; or

A liquidator when the company is in liquidation.

Where the company is controlled by the directors these actions are unlikely. However, the Act has also introduced new legislation whereby an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.

The position of director must not be accepted lightly - the law is designed to penalise those who act irresponsibly or incompetently, however, a director who acts honestly and conscientiously should have nothing to fear.

About The Author

Adams Moore is one of Tamworth's largest firms of accountancy and business advisers based in the centre of Tamworth with three Partners, five senior managers and a support team including accounts, audit, payroll and client support. Independently owned, the partners have over 60 years’ experience of assisting businesses of all shapes and sizes, providing quality and cost effective business advice.