Under the Companies Act 2006, a private company must have at least one director and a public company must have at least two. Directors have various roles and obligations and are responsible for the day-to-day running of a company. Directors can also be shareholders and/or employees of the company, and it is important that you draw a distinction between these separate roles and ensure you wear the right ‘hat’ for the job.

This article is the final part of our three-part series. To read parts one and two, which cover Shareholders and Partners, please click here.

The board of directors of a company oversees the management of a business. They make the operational and strategic decisions of the company and are responsible for ensuring that the company, which is a separate legal ‘person’, meets its statutory obligations.

The board of directors:

• Determines the company’s strategic objectives and policies
• Monitors progress towards achieving these objectives and policies
• Appoints senior management
• Accounts for the company activities to shareholders and other relevant parties

Directors make decisions to promote the success of the company and to protect the shareholders’ capital. As a director, you will fulfil this role by holding board meetings in which to make decisions.

There are two main types of directors that are recognised at law.

• De jure director
  • This is also known as a director in law or true director and is a person who has been validly appointed as a director.
  • De jure directors can also be executive or non-executive directors:
    • An executive director carries out executive functions in the company on a full-time basis; and
    • A non-executive director is usually an individual who only devotes part of their time to the affairs of the company.

• Alternate director
  • This is a person who has been appointed by an existing director to take their place temporarily at a board meeting or a series of board meetings. Alternative directors are only temporarily appointed.

Please note that there are other types of directors who are not recognised at law as they have not been validly appointed, but who may still be bound by directors’ duties and therefore liable for the actions they take on behalf of the company. However, this is beyond the scope of this article.

The directors may exercise all powers of the company and are typically agents of the company, appointed by the shareholders to manage the company’s day-to-day affairs. However, directors’ authority may be constrained by the Companies Act 2006 and the company’s Articles of Association (Articles). It is vital that you are aware of any obligations or restrictions imposed on you or of any powers that you may be granted. The Companies Act 2006 gives directors certain powers, including:

• the power to call general meetings;
• the power to allot shares;
• the power to execute documents as authorised signatories acting on behalf of the company; and
• the power to bind the company with third parties acting in good faith.

It is important to be aware that you are personally subject to statutory duties under the Companies Act 2006 in your capacity as a director. You are also responsible for ensuring that the company itself complies with any statutory controls that it is subject to. As a director, you have duties such as making any filings at Companies House and preparing accounts, for example.

Directors are also subject to 7 general duties under the Companies Act 2006:

1. To act within powers: directors must act in accordance with the company’s constitution (i.e. Articles and any resolutions that have been passed) and only exercise those powers for the purposes for which they were given.
2. To promote the success of the company: directors must act in the way that they consider, in good faith, would be likely to promote the success of the company for the benefit of the members as a whole. This will include, amongst other things, considering the likely consequences of any decision in the long term, the interests of the company’s employees and any impact on business relationships.
3. To exercise independent judgement: directors must make their own decisions and use their own judgement. They may take professional advice but must use their independent judgement when it comes to deciding whether they should follow it.
4. To exercise reasonable care, skill and diligence: the expected standard is measured against both objective and subjective considerations. Directors must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:

• The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company (objective standard); and
• The general knowledge, skill and experience that you actually possess (subjective standard).

5. To avoid conflicts of interest: directors must avoid situations where they have, or could potentially have, an interest that conflicts, or may conflict, with the interests of the company. An example would be having a personal interest in a company transaction, such as the sale of property to your spouse. Conflicts should be declared and can be authorised, either in the Articles, by a shareholder resolution or, in some cases, by the board of directors.
6. To not accept benefits from third parties: directors must not accept a benefit from a third party which is given because they are a director, or because they do or do not do something as a director (such as make a certain decision). This will be a conflict of interest. However, if acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest, this duty will not be breached.
7. To declare interests in proposed or existing transactions or arrangements with the company: As in duty 6 above, if directors are either directly or indirectly interested in a transaction or arrangement of the company, they must declare the nature and extent of this interest to the other directors. This must be done either before the transaction is entered into or, if it already has been, as soon as reasonably practicable.

The penalty for breaches of directors’ duties will depend on the nature and seriousness of the breach. A breach of a general duty may lead to the company (acting through the board of directors, excluding yourself) seeking an injunction, damages or compensation against you. Failure to disclose an interest in an existing transaction or arrangement with the company may also result in a criminal fine. Shareholders may also bring actions against you on the company’s behalf (i.e. derivative actions), with the court’s consent. Please note that, as above, you have other duties imposed on you under the Companies Act 2006 and the Articles that you will need to be aware of, including what your duties are if the company becomes insolvent.

The best way to avoid breaching your duties is to ensure that you are aware of what you need to do. Our Corporate and Commercial Tam team can answer any questions you may have or advise on whether a particular issue will put you in breach.

Should there already be a dispute between the directors, our Litigation Team will be able to assist with any business disputes. Contact us today and book your free 30-minute consultation.

This article is for informational purposes only and does not constitute legal advice. Individuals should not act upon the information contained in this article without first seeking professional legal and financial (tax) advice.

Tel:       01245 893400
Email:  info@backhouse-solicitors.co.uk
Visit:    17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.