Atwal Financial has organised numerous UK company incorporation’s for our clients around the world so congratulations if you are now a company director! As the saying goes, with great power comes great responsibility. But fear not. The following is a guide of your duties as a director.
What is a Director?
For as long as there have been businesses there have been directors running them. Directors are:
- Responsible for implementing and shaping the long term vision of an organisation.
- Responsible for putting their own needs secondary to that of the company.
According to BusinessDictionary.com “A company director does not have to be a stockholder (shareholder) or an employee of the firm, and may only hold the office of director” so the role itself is quite broad.
From a lack of clear definitions and overall vagueness came a need to define exactly what a director was responsible for – and for whom. This lead to the introduction of The Companies Act2006 which clearly set out the duties and responsibilities that come with being a director of a UK company.
We’re now going to run through each of these duties as set outby The Companies Act 2006.
Duty to act within powers
Although a director wields a great deal of influence in terms of the company’s trajectory and broader strategy, they are ultimately bound by its constitution and the rules within it.
You must be aware of all the fine print, such as the Memorandum and Articles of Association.
You cannot act in the interests of yourself at the behest of your company. A practical example of this might be issuing new shares without company approval. Remember, the company is a separate entity and not a vehicle to promote your own interests and profit from. You are liable to the views and actions of shareholders so it’s very important to have them in mind when it comes to significant decisions within the company.
Duty to promote the success of the company
According to The Companies Act, 2006 “A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefits of its members as a whole”. This can mean a number of different things, but the principle is that the director must have the greater interests of the company in mind with any decision that he or she makes.
So what kind of decisions or considerations must a director make to uphold the company values?
Many day-to-day aspects of what a director does could fall into this – but here are a few to give you an idea:
Needs of the employees
Perhaps the most important thing to remember is to always consider the well being of employees (although you may not have any yet!). They are the heart and soul of any business and it is important that they are given the right tools to perform their tasks to the best of their abilities.As a director, you are not meant to do their work for them, or necessarily manage them – it is important that you do what is needed to foster a friendly culture that is pleasant for employees to work in.
Suppliers, customers and others
A director is also responsible for creating a harmonious relationshipwith external influencers. Whether this is suppliers, customers or otherstakeholders – it is absolutely critical that there is a good relationshipbetween these influencers and the director. If none of these things are kept in check it is likely the business will suffer as a consequence, which would go against the main responsibilities of a director.
Consequences of long term decisions
As well as considering the needs of employees and outside influence’s,as a director, you must also make decisions that will affect the company in the long term – and deal with the consequences of such decisions. This can mean a number of things with different companies having varying aims and goals. However, as a director, you are responsible for large structural changes that will affect the company.
The company’s impact on the environment and local community
We live in an age of environmental accountability, which is reflected inthe duties directors must uphold. If a company is going to pursue greener policies it is unlikely that this will come from employees taking it upon themselves without clear instructions. A director is there to set the example for others to follow.
Duty to exercise reasonable care skill and diligence
Before The Companies Act 2006 was introduced this duty was only recognised in common law (laws developed through cases and court decisions) and was therefore very much open to interpretation.However, this has now changed and the idea of exercising care, skill and diligence is very much a key component of what is expected of directors.A director must be able to demonstrate the skills and abilities they have gained from previous experiences and apply them to their current directorship. For example, if a director has knowledge of a particular industry then they are expected to utilise this knowledge to help the company. Ultimately it’s about what a director can bring to the table and utilising their skill set.
Duty to avoid conflict of interests
A director is not allowed to act in a way that conflicts with the company.As a director, you are meant to set an example and push the company agenda – to contradict this is a serious matter.The Companies Act 2006 gives particular mention to exploitation of company property as well as the idea that directors may not make business opportunities without company approval.
Fresh fields law firm cites possible instances of conflict of interest:
- Being offered a role by a potential bidder of the company
- Being a trustee of the company’s pension scheme
- Having a relationship with the company in an advisory capacity
- Having an interest in an advisory firm
Duty not to accept benefits from third parties
A director must not abuse their position by accepting any benefits from a third party, whatever that might be. This is totally understandable – it would be unethical for company policy to be shaped by something that could be considered a bribe. Whilst taking bribes is obviously regarded as vulgar practice, there are other things that fall into the notion of third party benefits which are a bit more opaque. According to legal body Out-Law.com, the lines of what is deemed acceptable are not always clear. For example:
“If a large contract is up for tender, the director who will make the decision should not accept hospitality or a gift from one of the potential bidders” It should be clear within a company what is considered good practice when it comes to the acceptance of gifts and hospitality.
Duty to declare interest in a proposed transaction or arrangement
It is a director’s duty to declare any interest that they are to receive when entering into a contract with the company before any agreement is signed. A director must not be profiting from a company contract without company approval. Unlike the other duties of a director, failing to declare an interest in a transaction is a criminal offence. For this reason, it is extremely important that a director declares any interest that he or she has – or intends to have.
Other things to remember
Confirmation Statements, Annual Accounts, Company Tax Return and Corporation Tax It is the director’s responsibility to ensure that Companies House and HMRC filing obligations are taken care of. This includes filing Confirmation Statements, Annual Accounts, Company Tax Returns and paying Corporation Tax.Breaching liabilities If a director is found to be breaching their duties they could open themselves up to various liabilities.Various laws have been passed which have created clear consequences for breaking company protocol. These include the Company Directors Disqualification Act 1986, The Insolvency Act 1986, Health and Safety Work Act 1974 and the Corporate Manslaughter and Corporate Homicide Act of 2007.All of these laws ensure that if a director abuses his or her powers, then they will ultimately be punished.