A Guide to Complying with Directors’ Duties

In our guide, we will provide an overview of director’s duties and key considerations for your role, as well as offering practical advice on how to comply with your duties and also to be aware of directors’ personal liabilities. Whether you are a highly experienced director, or taking on this role for the first time, this article should be highly valuable in helping you better understand your practical and legal responsibilities.

General and Ethical Directors’ Duties

Company directors have a number of different general statutory duties to comply with, ensuring that they act in the best interests of the company and its stakeholders, avoid conflicts of interest and maintain high standards of governance over the business. The seven key statutory duties are as follows:

1. Directors have a duty to always act in accordance with the company’s constitution, exercising their powers only for the purposes they were granted. Directors should not misuse or act in excess of the powers granted by the company’s constitution, including the articles of association.

2. Directors have a duty to promote the success of the company, with regard for the interests of all key stakeholders, including employees, customers and suppliers. The community around the business, the environment and long-term consequences should also be considered in promoting the success of a company.

3. Directors must exercise their own judgement, avoiding conflicts of interest and not being influenced by others when making decisions for the business.

4. Whilst in the past directors were appointed merely for their name or reputation without the expectation for them to act as a board member, directors now have a duty to exercise skill, diligence and reasonable care.

5. Directors must avoid any situation where their personal interests are in conflict with those of the business. Should a conflict of interest arise, directors must declare this and take appropriate steps to manage it, which could mean recusing themselves from certain discussions, or seeking approval from the board.

6. Directors can’t accept benefits from third parties as these could be seen to influence their position and decision making.

7. Finally, directors have a duty to declare interest they have in existing or proposed arrangements, including personal financial interests or those of someone closely associated with them.

In addition to these seven general duties, directors also have administrative duties to keep statutory books up to date, making records of processes of decision making, along with considering the interests of creditors and filing returns.

Complying with the above duties is extremely important, as failing to do so could in some circumstances lead to termination from their directors’ contract, or legal disqualification from acting as a company director. In some cases, directors could be liable for damages sought by the company where directors have had a conflict of interest or been negligent.

Along with statutory duties, directors also have many ethical duties to fulfil in the interests of the business. Here is a brief guide to some of the ethical duties that directors must comply to:

1. Directors must not trade wrongfully or fraudulently. Under the Insolvency Act 1986, it is a criminal offence for directors to carry on the business of a company with the intention of any fraudulent purposes should the business be insolvent.

2. Appropriate anti-discrimination policies must be put in place by directors, preventing unlawful discrimination against employees or stakeholders of the business. Directors can be fully liable for unlawful discrimination, including harassment or victimisation.

3. Directors of a company have a duty to ensure robust health and safety protocols are implemented. Directors can be held responsible for H&S offences where the company is guilty or where a health and safety offence can be attributed to the neglect of a director.

4. Directors can be held liable jointly with the company if the company is convicted of an offence under The Bribery Act 2010. For a company to be convicted of a crime under the BA 2010, directors would have to have consented for the bribery to take place in the first place. Consequences could include disqualification, or even a maximum penalty of 10 years imprisonment.

Directors’ Duties when a Business is Insolvent

Insolvency is a complex area for businesses so it can be easy for directors to get on the wrong side of the law when it comes to their duties. When a company continues their daily operations whilst unable to pay their debts, or having liabilities that outweigh the business’s assets, they may be guilty of wrongful or fraudulent trading under Section 214 of the Insolvency Trading Act 1986.

Company directors found guilty of fraudulent trading may be liable to make a contribution to the company’s assets, could be at risk of disqualification under the Company Directors Disqualification Act 1986, or could be arrested or charged with fraudulent trading, which can incur a custodial sentence of up to 10 years in prison. As a result, understanding the rules for directors of an insolvent business is vital.

If you are a director of a company that is insolvent or facing financial difficulties, it’s important to contact a licensed insolvency practitioner as early as possible. LIPs will not only help businesses to make the right steps for the good of their business and creditors, but can advise directors on their duties to prevent fraudulent trading.

To speak about company insolvency, please do contact us for a free initial consultation.