What are the legal responsibilities of a company director?

There are a set of statutory duties and responsibilities that all company directors must adhere to. Failure to do so could lead to potential repercussions in the form of fines and penalties, personal liability for company debts, disqualification from acting as a company director for up to 15 years and even criminal charges. That’s why it’s so important to understand what your legal duties and responsibilities are.

The broad roles and responsibilities of a company director are to:

  • Ensure annual accounts and returns are produced and received by Companies House
  • Keep accurate and up to date company records
  • Be responsible for the health and safety of employees
  • Be answerable to the owners of the limited company
  • Be responsible for entering into credit agreements on behalf of the company
  • Register to pay business tax and file tax returns and annual accounts to HMRC
  • Use or disclose the company’s confidential information only for the benefit of the company
  • Report company changes to Companies House
  • Follow environmental and anti-corruption legislation
  • Follow statutory duties as set out in the Companies Act 2006 (below)

Contact our specialist team today if you require further information on the legal responsibilities of a company director.

As a company director, you must perform seven statutory duties as set out in the Companies Act 2006. These apply even if you’re not active in your role as a company director, you act as a director but have not been formally appointed or you control the board of directors without being on it.

Acting within their powers

The articles of association is a document that forms the central part of the company’s constitution. It sets out the rules by which the company must be run and administered. That includes the appointment of directors, directors’ powers and responsibilities, the issuing of new shares and the procedures relating to board meetings and shareholder decisions.

As a company director, you must be familiar with the articles of association and abide by the rules included in it. If you exceed your decision-making powers or do not follow the procedures set out in the articles of association, decisions you make could be overturned and you may have to compensate the company for any financial losses resulting from them. 

Promoting the success of the company

This duty may seem self-explanatory, but it does have some important implications. It dictates that company directors must act in the best interests of the company as a whole. That includes stakeholders such as employees, customers, suppliers and communities, as well as the shareholders and executives. The aim is to broaden the company’s objectives so they are not solely financial. 

Exercising independent judgement

Directors need to be informed about all areas of their business, so they don’t rely exclusively on others when decisions need to be made. Also, they shouldn’t be influenced and forced into action by major shareholders, but rather take time to form their own opinion on any given situation and act accordingly.

 Exercising reasonable skill, care, and diligence

Company directors are expected to exercise reasonable care, skill and diligence in every aspect of their role. There was a time when directors could be appointed purely for their name or reputation, without having to fulfil any of the responsibilities associated with being a board member. This duty ensures that company directors must be able to perform the functions of a director with competence. Failure to do so could lead to claims for negligence.

Avoiding conflicts of interest

Directors must avoid conflicts of interest wherever possible and disclose any that do exist, including direct and indirect conflicts. An example of a conflict of interest includes carrying out an executive role for a company that’s a competitor. When a conflict of interest is disclosed, the board will then decide whether to approve the situation or put in measures to resolve/manage it.  

 To refuse benefits from third parties

Connected to the legal responsibility to avoid conflicts of interests, company directors must maintain objectivity at all times by not accepting any gifts or benefits from third parties. However, If the gift or benefit cannot reasonably be viewed as a conflict of interest it isn’t an infringement of the rule.

Declaring an interest in a proposed transaction or arrangement

If a director has a direct or indirect interest in a proposed transaction or arrangement with the company, they must declare their interest to the other board members. It will then be up to the non-conflicted directors to manage the situation and maintain the board’s integrity.