The roles and responsibilities of a limited company director
As well as the day-to-day running of the business, directors of limited companies have duties imposed on them by law, writes Laura Earps of law firm Brabners LLP.
These duties seek to hold limited company directors to account for the way in which they run the company and seek to protect the company by regulating the director’s (or directors’) behaviour.
If a limited company director is found to be in breach of any of these duties, then they risk incurring liability and action may be taken against them. Directors therefore must comply with their duties at all times to avoid this risk of liability.
What are the 7 legal duties of a limited company director?
The Companies Act 2006 codified certain common law and equitable duties of directors.
In summary, the seven general duties under the Companies Act 2006 are:
- To act within powers.
- To promote the success of the company.
- To exercise independent judgement.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest
- Not to accept benefits from third parties.
- To declare an interest in a proposed transaction or arrangement.
The seven duties apply to all directors of a company and are owed to the company. Let’s explore each one to see what they mean for contractors, in practice.
1. Duty to act within powers (section 171)
This duty requires directors to act in accordance with the company’s constitution and within the powers conferred by the memorandum and articles of association.
Directors are obligated to exercise these powers appropriately; exceeding these powers may lead to a decision being reversed or financial penalties for any related financial losses incurred.
2. Duty to promote the success of the company (section 172)
Directors are required to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of the company as a whole and, in doing so, have regard various factors (including but not limited to): the short and long-term impact on shareholders’ employee interests, and relationships with suppliers, customers and clients. They should also consider any potential impact on the environment and the company’s reputation. A subjective rather than objective test is applied to this duty.
3. Duty to exercise independent judgement (section 173)
As a director, the duty to exercise independent judgement seeks to ensure that directors act independently in their decision-making. Simply acting under the instructions (or in the interests of) a third party without giving consideration to the interests of the company could constitute a breach of this duty.
4. Duty to exercise reasonable care, skill and diligence (section 174)
This duty ensures that directors carry out their functions sufficiently, carefully and competently. The duty will be therefore breached if a director is incompetent or negligent and falls below the required standard of behaviour.
5. Duty to avoid conflicts of interest (section 175)
Directors must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company.
This duty extends to the exploitation of information, property or opportunity for personal purposes, regardless of whether the company itself could take advantage of it and continues to apply once a director leaves the company.
6. Duty not to accept benefits from third parties (section 176)
A director must not accept any benefit (including any kind of financial inducement or bribe) from a third party which is conferred for the purposes of being a director, or before you do (or not do) something as a director.
7. Duty to declare interest in proposed transaction or arrangement with the company (section 177)
This duty requires directors who are (directly or indirectly) personally interested in a proposed or existing transaction or arrangement to declare the nature and extent of this interest to the other directors.
What happens if I don’t uphold limited company director’s duties?
A limited company director who fails to uphold their duties faces risking legal action and criminal fines. If a breach of duty causes the company financial loss, then a director may also be responsible for covering the costs of any losses incurred.