The Companies Act 2006 ('the Act') has reorganised and restated directors' duties into a statutory statement of seven general duties. Summarised below are the seven general duties set out in ss.170 to 177 of the Act, with particular reference to the new additions introduced by the Act.
This is a duty that a director of a company must act in accordance with the company's constitution and must only exercise powers for the purposes for which they are conferred.
A director's powers are normally derived from the company's constitution, i.e. its articles of association, but these can be further restricted by the terms of a shareholders' agreement. Thus, under the terms of a shareholders' agreement, a director might be restricted from committing the company to purchase goods without the decision being approved by the board of the company if their value was in excess of an amount specified within the shareholders' agreement.
This is a new duty to act in the way a director considers, in good faith, to be most likely to promote the success of the company. The director is also required to have regard to some of the following factors (not an exhaustive list):
This duty introduces wider corporate social responsibility into a director's decision making process.
'Success' is not defined in the Act, but it is thought that in relation to a commercial company, success is considered to be the company's long-term increase in value.
It is not clear how a director should balance conflicting factors in his/her decisions, for example, the impact on the company's operations on the community (e.g. deciding not to close a factory) might not always be consistent with shareholders' interests. It is therefore important that detailed minutes are taken when exercising decisions, to document the fact that directors have had regard to the various factors listed.
This duty is of particular importance to non-executive directors who must avoid being 'sleeping directors,' that is, directors who play no active role in the management and leave decisions to others. However, a director is not in breach of this duty if he or she exercises his or her own judgment in deciding whether to follow someone else's judgment on a matter. In other words, provided a director does not follow the decisions of others blindly, but intelligently, and after careful consideration makes his or her own decisions, the fact that his or her decision is the same as the decisions of others, does not indicate that the director is not exercising independent judgment. In addition, this duty is not infringed upon if a director acts in accordance with an agreement that was duly entered into by the company.
This is a two-part test:
Therefore, a director who has more experience, knowledge and skill, will have a higher threshold in discharging this duty. For example, if a director is a chartered structural engineer, he/she will be expected to bring to the role of director the general knowledge, skill and diligence of a reasonably diligent chartered structural engineer which will be higher, in his/her specialist area, than the general knowledge, skill and diligence of a reasonably diligent person without that qualification.
A director of a company must avoid a situation in which he/she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies in particular to a transaction between a director and a third party, such as the exploitation of any property, information or opportunity. Such transactions can be authorised by the non-conflicted directors on the board, provided that certain requirements (including who can participate and vote on such authorisation) are complied with. This is of particular importance for non-executive directors who are more likely to encounter conflicts of interests owing to the holding of multiple directorships.
A director is not permitted to accept a benefit from a third party by reason of his/her being a director or his/her doing or not doing anything as a director. Benefits cover both those of a monetary and non-monetary nature, including, for example, non executive directorship or corporate entertainment.
However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Nevertheless, because it is not always clear whether certain benefits will give rise to conflicts of interest, it is advisable for non-executive directors to be wary of benefits from third parties.
A director is required to disclose his/her interest to the board of the company when a transaction is proposed between something he/she has an interest in and the company. For example, if a company wishes to take over another business in which the director has an interest, the director needs to reveal the fact that he/she will benefit from the takeover. The director is required to declare the nature and the extent of the interest to the other directors. Disclosure also extends to a person connected with the director, for example, his/her spouse and children.
The requirement for disclosure is dispensed with in circumstances where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or if other directors are already aware or 'ought reasonably to be aware' of the director's interest. Thus, if the other directors know that the director is not involved in the day-to-day running of the business to be taken over, but that he guarantees certain financial obligations of that business in the event of insolvency, there would be no conflict of interest arising on the takeover of the business provided that the business was solvent.
There are a number of situations where a director can incur personal liability. Examples are given below:
Financial institutions may require that directors personally guarantee any loan to, or other indebtedness of, the company. If an unlimited guarantee is given, this effectively destroys the advantage of limited liability. This means that if a company is unable to repay the loan or other debt, the debt is enforceable against the director and all their personal assets. If a limited guarantee is given, the maximum liability of a director will be that stated in the guarantee together with interest.
The court can, and sometimes must, disqualify a person from being a director of any company without leave of the court, for up to 15 years (Company Director's Disqualification Act 1986). A person who is involved in the management of a company in contravention of a disqualification order will be personally liable for liabilities incurred while he was so involved (Company Directors Disqualification Act 1986 s.15).
A person who contravenes this requirement is personally responsible for all the debts of the new company incurred at a time when that person was involved in the management of the company.
Directors have a responsibility to prepare and deliver documents, on behalf of the company, to Companies House as and when required by the Companies Act. These include, in particular:
Failing to submit certain company information on time is a criminal offence, for which directors may be prosecuted and fined.
All private limited and public companies must file their accounts at Companies House.
If you are filing your company's first accounts and those accounts cover a period of more than 12 months, you must deliver them to Companies House:
Unless you are filing your company's first accounts, the time normally allowed for delivering accounts to Companies House is:
Failure to deliver accounts on time is a criminal offence. All the directors of the company risk prosecution. On conviction, a director could end up with a criminal record and a fine of up to £5,000 for each offence.
Every company must deliver an annual return to Companies House at least once every 12 months. The company's director(s) and the secretary (where applicable), are responsible for ensuring that they deliver the annual return to Companies House within 28 days after the anniversary of incorporation of a company or of the anniversary of the made-up date (i.e. the date at which all the information in an annual return must be correct. The made-up date is usually the anniversary of the incorporation of the company or the made-up date of the previous annual return registered at Companies House) of the last annual return.
If you do not deliver the company's annual return, the Registrar might assume that the company is no longer carrying on business or in operation and take steps to strike it from the register.
It is a criminal offence not to deliver the company's annual return within 28 days of the made-up date, for which Companies House may prosecute the company and its officers.
An annual return is a snapshot of certain company information at the made-up date. It is a separate document from a company's annual accounts. An annual return must contain the following information:
If the company has share capital, the annual return must also contain: