A guide to directors’ duties

With a nominal Companies House fee and a short form to complete, setting up a limited company and becoming a director of said company has never been easier. However, many are unaware of the duties that fall upon them once the payment has been processed and the Registrar of Companies has been updated. From statutory duties under the Companies Act 2006 to instances of personal liability under the Insolvency Act 1986 (“IA86”), being a director of a limited company in the United Kingdom can be a difficult position to navigate.

The role of a director will be defined in the company’s articles. If the director is also an employee, the role will be further defined in their employment contract. It is entirely separate from that of the company’s shareholders, though in some cases there is an overlap. A director, or a board of directors, takes on the responsibility for the strategic and operational running of the organisation. This also includes the associated statutory and legal obligations.

Directors must ensure the company is run in accordance with the articles of association and the provisions of the Companies Act 2006. Directors have a fiduciary duty to act in the best interests of the company, as its own separate legal entity, and to act in good faith in a responsible manner.

Statutory duties under the Companies Act 2006

The Companies Act 2006 sets out seven statutory duties for company directors in the United Kingdom.

• To promote the success of the company.
  This includes acting in good faith for the benefit of the shareholders as a whole. Note: this duty shifts to make the interests of the company’s creditors the directors’ primary consideration when the company is insolvent or on the brink of insolvency.
• To act within powers.
  As mentioned above, the powers of a director are detailed in the company’s constitution (usually within its Articles of Association).
• To exercise independent judgment.
  This requirement does not seek to discourage a director from acting in accordance with the company’s constitution. However, it promotes due care and unbiased opinions when decision making.
• To exercise reasonable care, skill and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare interests in transactions of arrangements with the company.

A breach of the statutory duties can allow for the company to act against an individual director, resulting in personal liability for said director. During an insolvency procedure, this may be carried out by a liquidator or even a shareholder. The subsequent action taken would depend on the nature and severity of the breach. It may include, but is not limited to, fines, injunction, and compensatory / damages payments.

Responsibilities of a company director during insolvency

As soon as a director considers their company may be facing financial difficulty, they should seek independent legal advice. When an organisation is facing financial distress or is insolvent, a director’s duty to the company shifts and becomes one to the creditors of the company as a whole.

On the appointment of a liquidator or an administrator, directors remain in their position for statutory purposes, but their powers cease. During an insolvency procedure, directors have a duty to cooperate with the officeholder (s235 IA86).

Under the Insolvency Act 1986, potential personal liabilities for directors can arise from the following:

Misfeasance (Section 212 IA86) – Applies if, in the course of a winding-up, a director has retained company property or breaches any fiduciary or other duty relating to the company. If found guilty of misfeasance, the court may order the director to restore the company to the position as if the misconduct had not occurred. This is likely to include repayment of any profits or gains made as a result of the breach.

The court may also require the director to account for any gain or loss made to the company and possibly make a personal contribution (i.e., from their personal assets) to the company’s assets. This contribution has no limit.

Fraudulent trading (Section 213 IA86) – Can arise in a winding-up when a party is knowingly carrying on the business of the company with the intention of defrauding creditors. In this case, the court may order a director to make a personal contribution to the company’s assets. Being found guilty of fraudulent trading can also lead to imprisonment for up to 10 years and may be accompanied by an unlimited fine payable by the director personally.

Wrongful trading (Section 214 IA86) – Applies when a director, or shadow director, knew or ought to have known there was no reasonable prospect of the company avoiding an insolvent liquidation or administration prior to the start of the winding up. Again, the court may order a director to make a personal contribution to the company’s assets.

Please note, with the introduction of the Corporate Insolvency and Governance Act 2020, the provisions relating to wrongful trading were relaxed between 1 March 2020 to 30 September 2020 in order to assist directors dealing with the effects of the Coronavirus pandemic. However, in light of the continuing effects of the pandemic, the wrongful trading provisions were again relaxed from 26 November 2020 to the 30 April 2021, and again extended to the 30 June 2021. The other provisions under the Insolvency Act remained in place, as did those under the Companies Act.

Company Directors Disqualification Act 1986

Personal liability for a director can arise under the Company Directors Disqualification Act 1986 as a result of investigations carried out by a liquidator or administrator into the director’s conduct. This can result in a director facing a fine and/or disqualification from two to 15 years, dependent on the nature of the offence.

Disqualification halts the individual’s ability to be involved in the formation, promotion or management of any company in the United Kingdom during the disqualification period.

Personal liability for a director

To summarise, a director can be found personally liable when they:

• Fail to comply with the responsibilities set out in the Companies Act 2006
• Are held accountable under one or more of the provisions of the Insolvency Act 1986
• Are found guilty of an offence under the Company Directors Disqualification Act 1986 and, as a result, is fined or has a compensation order awarded against them.

Where directors can seek help

While a company continues to trade and is solvent, directors have a duty to act in the best interests of the company and its various stakeholders. Where a company is facing financial difficulty or is insolvent, the directors’ duty shifts to make the interests of the company’s creditors their primary consideration.

If you have any questions regarding directors’ duties, please get in touch with the experienced team at Moore Kingston Smith Licensed Insolvency Practitioners. They can offer practical advice to help ensure all duties are carried out in full.