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5 Golden Rules to aid directors’ duties compliance

Golden Rule 1: comply with the 7 general duties in the Companies Act 2006 (“the Act”)

In your capacity as a director you need to individually and personally comply with the seven codified statutory duties as a starting point.

Section of the Companies Act 2006Headline dutyContext behind the headlines
171To act within your powers as a director
Use your powers for proper purposes and do not stray outside what you are empowered to do by your company’s constitution which includes the articles of association and any shareholder resolutions. In this context, adhere to your Directors service agreement too to avoid separate action for breach of contract.
172To promote the success of the company for the benefit of the members as a wholeHave regard to inter alia
(a) the likely consequences of a decision in the long term;
(b) the interests of the company's employees;
(c) the need to foster the company's business relationships with suppliers, customers and others;
(d) the impact of the company's operations on the community and the environment;
(e) the desirability of the company maintaining a reputation for high standards of business conduct; and
(f) the need to act fairly as between the members of the company.
173To exercise independent judgmentYou must not subordinate your power to the will of others. This does not prevent you from relying on advice, so long as you exercise your own judgement on whether or not to follow it. This duty does not prevent you from acting in accordance with an agreement entered into by the company or in a way authorised by the company's articles of association.
174To exercise reasonable care, skill and diligence
The standard of care required is that which a person would exercise on his own behalf – it has an objective element and a subjective element to it.

Objectively - this means the care, skill and diligence that may reasonably be expected of a person carrying out the functions carried out by you in relation to the company

Subjectively – this means the general knowledge, skill and experience that you actually have (measuring you against a higher standard if you possess particularly relevant sector experience or unique or professional skills and qualifications for example).
175To avoid conflicts of interestYou should examine your interests and review your indirect interests, including at least the interests of your “connected persons”. The company can authorise a conflict of interests in certain circumstances.
176To not accept benefits from third partiesThe duty is not wide as it literally reads. It is not infringed if you accept a benefit which cannot reasonably be regarded as likely to give rise to a conflict of interest. So limited corporate hospitality should not give rise to a breach of this duty.
177To declare an interest in a proposed transaction or arrangement.The duty here is not referring to an outright prohibition – it is saying an interest has to be declared to the board under section 177 (proposed transactions or arrangements) and section 182 (existing transactions or arrangements) of the Act. Consider your “connected persons” as their interests will count as your indirect interests for the purpose.


Golden Rule Number 2: comply with other key company law provisions

These include a duty to keep proper books and records, and restrictions on entering into certain transactions with the company or accepting loans from the company. Directors as officers of the company must also ensure the company fulfils its duty to investigate, obtain and update information on the right persons to be admitted in the persons of significant control register (as per sections 790D and 790E of the Act).

One of the main statutory responsibilities falling on directors is the preparation of the accounts and directors’ report (section 441 of the Companies Act 2006). It is the responsibility of the directors to ensure that the company maintains full and accurate accounting records. This includes the preparation of a balance sheet and a profit and loss account for each financial period of the company and the presentation of these to shareholders and, subject to various exemptions, the filing of the accounts and the directors’ report with the Registrar of Companies.

Breach of these duties and requirements can result in fines, or in the worst cases, a director being disqualified from acting as a director and in many cases can lead to the director incurring personal liability. Insurance can be obtained to cover some cases of personal liability.

Steer clear of the transgressions outlined in the Company Directors Disqualification Act 1986. Section 2(1) empowers the court to disqualify an individual convicted of an offence in connection with the management of a company.

Golden Rule Number 3: beware of trading while insolvent or near-insolvency, and in such scenarios you will be required to put the needs of creditors above those of shareholders (to avoid inter alia liability for wrongful trading or fraudulent trading)

Wrongful Trading (section 214 Insolvency Act 1986)

If a company has gone into insolvent liquidation and before that liquidation took place a director knew, or ought to have known, that there was no reasonable prospect that the company could avoid the liquidation, then the court may declare that the director make a personal contribution to the company’s assets.

However, the director will not be made personally liable in circumstances where the director can show that every step was taken prior to the liquidation to minimise the potential loss to the company’s creditors.

Fraudulent Trading (section 213 Insolvency Act 1986)

Under this heading the court may also require a director to make a contribution to the company’s assets if, in the course of the winding up of a company, a director was knowingly a party to the carrying on of the company’s business with the intent to defraud its creditors or creditors of any other person, or for any fraudulent purpose.

Golden Rule Number 4: Plan, Do, Check and Act regarding health and safety.

Directors must comply with the Health & Safety at Work Act 1974 (“the HSWA”) and related legislation with this Plan, Do, Check Act mindset. This will be particularly important if your company in any way deals in physical operations, the movement of people, or goods from A to B. Avoid unsafe and dangerous operations and if this is not possible, lower your risk to the lowest possible tolerable levels.

Health and safety legislation places duties on organisations and employers, and directors can be personally liable when these duties are breached. Larger public and private sector organisations need to have formal procedures for auditing and reporting health and safety performance. If a health and safety offence is committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other similar officer of the organisation, then that person (as well as the organisation) can be prosecuted under the HSWA.

In an equally serious vein, familiarise yourself with the Corporate Manslaughter and Corporate Homicide Act 2007. Under this Act, an offence will be committed where failings by an organisation's senior management are a substantial element in any gross breach of the duty of care owed to the organisation's employees or members of the public, which results in death. The maximum penalty is an unlimited fine and the court can additionally make a publicity order requiring the organisation to publish details of its conviction and fine.

Individual directors are also potentially liable for offences such as the common law offence of gross negligence manslaughter. Under the common law, gross negligence manslaughter is proved when officers of a company (chiefly its directors) cause death through their grossly negligent behaviour. This offence is punishable by a maximum of life imprisonment.

Golden Rule Number 5: remember confidentiality, and who you owe your duties to

Your duties as director are owed to the company, not to whomever appointed you, or to a particular shareholder. The common law duty of confidentiality with the respect to the company’s commercial affairs is the perfect reminder for a director as to where he owes his duty. If you are in a situation where you need to discuss or share the company’s commercial information with any third party, you might wish to seek a dispensation from the company which will ideally prevent you from breaching your duty of confidentiality.

Caveat & Disclaimer

This summary briefing provides only a short summary of the main duties, responsibilities and liabilities an individual director. It is not exhaustive, nor could it be, without a full encyclopaedic assessment of all legislation which imparts duties on a director of a UK company. Individual directors, if in doubt about the proper application of their duties to their particular role or a particular situation, should seek independent legal advice. For queries on this particular note, please contact jp.irvine@keystonelaw.co.uk


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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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