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Are you aware of your duties as a director?

The board of directors are responsible for the day-to-day management of the Company and make the strategic and operational decisions for the Company, and are responsible for ensuring that the company meets its statutory obligations.

While being a Director is sometimes portrayed as a simple, box ticking exercise, in reality Directors in the UK can be held to account for the way in which they manage the day-to-day activities of a company so it is crucial that they understand and adhere to the duties that are imposed upon them to prevent a breach of those duties.

Here Michelle O’Flaherty and the JTC Corporate Transactional team break down some of the key duties of a Director:

To act within their powers

Pursuant to Section 171, of the Companies Act 2006 (“CA 2006”), a  Director must act in accordance with the Company’s constitution, including and without limitation to the Articles of Association of the company and agreements of a constitutional nature (such as a Shareholders Agreement) and only exercise their powers for the purposes for which they were conferred. This ensures that directors do not allow themselves to be influenced by any improper purpose. Directors should be mindful in ensuring that they have the requisite authority to act.

To promote the success of the company

Pursuant to Section 172 CA 2006, directors must act in a way they consider to be in good faith and promote the success of the Company for the benefit of the members as a whole. “Success” in the context of this duty will generally mean a long-term increase in the value of the Company, although it is up to each director to decide, in good faith, whether it is appropriate for the Company to take a particular course of action.

Examples of considerations are:

  • The likely consequences of any decision in the long term
  • The interests of the company’s employees
  • The need to foster the company’s business relationships with suppliers, customers and others
  • The impact of the company’s operations on the community and the environment
  • The desirability of the company maintaining a reputation for high standards of business conduct
  • The need to act fairly as between members of the company

To exercise independent judgement

Pursuant to Section 173 CA 2006, there are circumstances when a director’s ability to exercise independent judgement may be restricted when acting in accordance with an agreement entered into by a company or by a company’s constitution. However, this does not prevent a director taking independent legal advice. A director must not be dominated by another director or by its shareholder(s).

To exercise reasonable care, skill and diligence

Pursuant to Section 174 CA 2006, a director is required to exercise reasonable care, skill and diligence. The Act refers to a subjective and objective test, meaning that the care, skills and diligence exercised by:

  • A reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions (subjective test); and
  • the general knowledge, skill and experience that the director has (objective test).

To avoid conflict of interest

Pursuant to Section 175 CA 2006, directors must avoid situations where they may have a direct or indirect interest, which does or could potentially conflict with the interests of the Company. The directors have a duty to disclose any potential conflicts in accordance with the Company’s Articles of Association. Such conflicts are subject to each entity and the regulations within their articles of association – under model articles the conflicted director is not able to vote ie not counted in quorum whereas there are bespoke articles which may allow a director to vote once declaring a conflict/interest.

 Not to accept benefits from third parties

Pursuant to Section 176 CA 2006, directors must not accept benefits from third parties relating to their position as a director of the Company. This duty is designed to prevent a conflict of interest. However, unlike the duty to avoid conflicts of interest, there is no provision for the board to authorise the benefit.

To declare interests in any proposed transaction or arrangement

Pursuant to Section 177 CA 2006, directors must declare a direct or indirect interest in a proposed transaction or arrangement. In this respect, a director is treated as being either aware or ought to have been aware of the interest. Failure to declare an interest may result in the transaction or arrangement being void and potential for the director to face a criminal penalty.

Consequences of a breach of directors’ duties

It is the responsibility of the directors to understand and act in accordance with their duties under the Companies Act and failure to comply can result in penalties for a range of offences.  If a director breaches their fiduciary duties towards their company, the Company can take legal action against the director in breach. The stakeholders seeking restitution for financial loss or damage usually instigate this action. Depending on the type of director misconduct, the Company has a range of legal options available. The Company may ask the director in question to account to them for any loss of profits, pay compensation, return company property or rescind contracts the director may have entered into. There are some duty breaches that are considered a criminal offence which can result in disqualification and fines, or even imprisonment in more serious instances. It is prudent for companies to keep detailed records of all decisions made and the reasoning behind that specific decision.

 

ADDITIONAL DUTIES IMPOSED UPON DIRECTORS

Submission of annual confirmation statement with Companies House

Directors are responsible for filing an annual confirmation statement with Companies House. This document confirms that the information held at Companies House is correct and up to date.

 Filing annual accounts with Companies House

In order to report a company’s trading status and financial activity, directors must file annual accounts at Companies House. First accounts should be delivered no later than 21 months after the date of incorporation. Subsequent annual accounts for a limited company must be filed with Companies House 9 months after the end of the company’s financial year. For those companies which have not traded, dormant accounts are required to be filed with Companies House in the said timeframe.

 Registering for business tax

Within three months of a limited company starting to trade, the Company must register with HMRC for corporation tax, which can be done online. It may also be necessary to register the Company for other business taxes and HMRC services such as VAT, PAYE or the Construction Industry Scheme (CIS).

 Filing Company Tax Returns and annual accounts with HMRC

Annual accounts must be delivered to HMRC as part of the Company Tax Return, which is used to work out and report how much Corporation Tax (if any) the company owes. The filing deadline is 12 months after the end of the Company’s ‘accounting period’ for Corporation Tax. Directors must ensure that any Corporation Tax owed by the company is paid no later than 9 months and 1 day after the end of the Corporation Tax accounting period.

 Submitting company changes to Companies House

Directors are responsible for submitting certain changes to Companies House which include registered office address, SAIL address, appointment or removal of a director/company secretary, change of director’s/company secretary details, change of shareholder, issue of new shares, change of PSC details, change of location of statutory records, change of company name, change of articles of association and registration of charges. It should also be noted that HMRC should be notified if the company’s contact details change or when an accountant or tax advisor is appointed.

 Important to note

As well as the above, other legislation such as Financial Service and Markets Act 2000, the Insolvency Act 1986, the Corporate Manslaughter and Corporate Homicide Act 2007 and the Bribery Act 2010 all impose additional duties and breaches of such duties can give rise to both civil and criminal action.

This list is by no means exhaustive which goes to show the level of responsibilities faced by Directors who may also have multiple demanding roles within different companies. Outsourcing can offer a beneficial, flexible solution for businesses, with the Director role fulfilled by a dedicated team of experienced professionals.

To find out more about JTC’s range of solutions, please get in touch with Michelle O’Flaherty and the JTC Corporate Transactional team.

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