A guide to directors’ duties and responsibilities in the UK
In the complex and high-stakes world of corporate governance, understanding the various directors’ duties and responsibilities in the UK is essential to ensuring that you are not only compliant but also acting in the best interests of your company. Having a sound understanding of this ensures good governance and regulatory compliance, which is key to safeguarding the interests of the company and its stakeholders, both internally and externally.
In this article, we’ll share our knowledge to help directors better navigate their roles, avoid legal pitfalls and enhance their company’s performance.
Definition and types of directors in a company
What is a director in a company?
A director of a company is a person appointed to the board of a business. They are responsible for supervising the company’s management and making key business decisions. Understanding the duties of a director in the UK means that you’ll need to explore the roles and expectations set forth by legal and corporate standards.
Types of directors
Each type of director brings a unique perspective and skill set, contributing to the overall governance and strategic direction of the company. Different types of directors include:
Executive directors
These directors are involved in the daily management of the company. They are typically part of the leadership team and will be tasked with making key decisions.
Non-executive directors (NEDs)
A non-executive director of a company is often brought into the frame to provide an independent perspective to the board, usually focusing on broader strategy rather than day-to-day operations.
Independent directors
Similar to NEDs, independent directors do not have any material relationship with the company or its related parties but primarily exist to provide advice and support.
Shadow directors
These are individuals who are not officially appointed as directors but exert significant influence over the board’s decisions, hence their mysterious-sounding name.
Legal framework governing directors’ duties in the UK
Companies Act 2006
The Companies Act 2006 is the cornerstone of company law in the UK. It outlines the statutory duties of directors, aiming to codify and clarify common law principles. Key duties under the Companies Act 2006 include:
- Directors must adhere to the company’s constitution and use their powers for their intended purposes. This prohibits directors from hurting the company for personal gain, for example.
- Directors should act in the way they consider, in good faith, would most likely promote the company’s success, and avoid conflicts of interest to the best of their ability.
- Directors must make decisions independently, free from undue influence. This ensures that they make impartial decisions that will be in the best interests of the company, without being manipulated by a third party.
- Directors are expected to perform their roles with the care, skill, and diligence that would be exercised by a reasonably diligent person carrying out the functions expected from the director.
Other relevant legal frameworks and regulations
Beyond the Companies Act 2006, directors must navigate additional regulations such as:
- The Insolvency Act 1986: This act governs issues related to company insolvency, including directors’ conduct when a company is in financial distress.
- Corporate governance codes: These include the UK Corporate Governance Code, which provides guidelines for board composition, remuneration, accountability, and relations with shareholders.
- Sector-specific regulations: Depending on the industry, directors might also need to comply with additional regulatory requirements, such as those imposed by the Financial Conduct Authority (FCA).
General duties of directors in the UK
Duty to act within power
Directors must act according to the company’s constitution and only exercise powers for their intended purposes. For example, if a company’s articles of association restrict certain decisions to shareholder approval, directors must adhere to these limitations. This duty ensures that directors’ duties align with the company’s objectives and legal constraints.
Duty to promote the success of the company
Directors should act in a way that they think would most likely to further the interests of the company for the benefit of its members as a whole. This includes considering the long term consequences of decisions, the interests of employees, the need to foster business relationships with suppliers, customers, and others, and maintaining a reputation for high standards of business conduct.
Duty to exercise independent judgement
Directors are required to exercise independent judgement and make decisions that would deliberately result in benefits from third parties. This duty does not prevent directors from seeking advice but ensures that the final decision is reflective of them being able to exercise independent judgement.
Duty to exercise reasonable care, skill, and diligence
Directors must exercise care, skill, and diligence in their roles. This combines both an objective and subjective standard.
Duty to avoid conflicts of interest
Directors should avoid conflicts of interest where their interests go against, or may conflict, with the interests of the company. This includes both direct and indirect conflicts of interest, such as personal financial interests or relationships that might influence their decisions.
Duty not to accept benefits from third parties
Directors must not accept any benefits from third parties that come about because they are directors or because of their actions in their role as directors. This is to help them avoid conflicts of interest or perceived influence that could compromise their decision-making.
Duty to declare interest in proposed transactions or arrangements
Directors must declare to the other directors any interest they have in a proposed transaction or arrangement with the company. This ensures transparency and allows the board to consider risk and better manage or avoid conflicts of interest.
What are the specific responsibilities of a director in a company?
Strategic decision making
Directors are responsible for setting the strategic direction of the company. This involves long term planning, resource allocation, and ensuring that the company’s activities align with its goals and mission.
Financial oversight and management
Directors must oversee the financial performance of the company, ensuring accurate financial reporting, effective internal controls, and compliance with financial regulations.
Compliance with statutory obligations
Directors must ensure the company complies with all statutory and regulatory requirements. This includes filing annual returns, maintaining proper records, and adhering to specific laws.
Reporting and disclosure requirements
Directors must ensure that all necessary reports and disclosures are made accurately and on time. This includes annual financial statements, directors’ reports, and disclosures required by the Companies Act 2006.
Risk management and internal controls
Directors are responsible for implementing and maintaining effective risk management and internal control systems. This helps safeguard the company’s assets and ensures its long term viability.
Best practices for directors
Regular training and development
Directors should engage in ongoing training and development to stay abreast of the latest legal requirements, corporate governance trends, and industry developments.
Staying informed about changes in laws and regulations
Directors must stay informed about changes in relevant laws and regulations to ensure continued compliance and effective governance. This includes updates to the Companies Act 2006.
Implementing robust governance practices
Directors should implement robust governance practices, such as establishing clear policies, maintaining transparency, and promoting accountability.
Seeking professional advice when necessary
Directors should not hesitate to seek professional advice, such as legal, financial, or technical expertise, when necessary. This ensures that they make well-informed decisions that are in the interests of the company.
Where directors can seek help
While a company continues to trade and is solvent, directors must act in the best interests of the company and its various stakeholders. When 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.
