The 7 Directors Duties – Explained
Posted on 1st April 2021
Directors are obliged to meet seven duties (as laid out in The Companies Act 2006) as part of the ongoing running of the business. Otherwise, they can be hit with fines, penalties, and bans from working as a director at any company in the UK. Those restrictions can potentially last for life.
The Companies Act 2006 is an Act of Parliament that was slowly implemented into UK law from November 2006 to October 2009, replacing the previous Companies Act 1985. The 1,300 sections are still in use today and covers many different aspects of business and corporation law.
Director duties are included within the Act as part of the common law principles. Directors, both old and new, are expected to respect and adhere to those legislations. Essentially, directors are obliged to work in a way that is built for the benefit of the company rather than personal gains, and this concept is broken into seven sections.
The seven duties explained
1. Duty to act within powers
The director of the limited company should act in accordance with the company’s constitution while also exercising their power only for the conferred purposes.
2. Duty to promote the success of the company
The director must act in good faith and with the best interest of the company and its members in mind at all times. To do this, the company must act fairly between members of the company, consider any potential repercussions of business decisions, and foster the company’s business relationships with suppliers and customers.
Directors also have a duty to act in the best interests of the company’s creditors at all times.
3. Duty to exercise independent judgment
The director should make decisions based on independent judgement, unless it’s a situation that’s authorised by the company’s constitution or in circumstances where the company has duly entered an agreement that restricts the future exercise of discretion by its directors.
4. Duty to exercise reasonable care, skill and diligence
The director should act with care, skill and diligence while anyone entrusted to act on behalf of the company in tasks ordinarily handled by the director should have the same skills, diligence and general knowledge that would be expected of a director.
5. Duty to avoid conflicts of interest
The director must avoid situations that could be considered a conflict of interest for the company. This extends to the exploitation of any property, information or opportunity – even if the company could benefit.
Directors are not duty bound when the situation arises due to a transaction or arrangement with the company. Meanwhile, authorisation from the directors can exempt the director from this duty. Authorisation can be given when the proposed authorisation will not invalidate a private company’s constitution or when a public company’s constitution has provisions for such situations.
6. Duty not to accept benefits from third parties
The director must not accept benefits from third parties (a person other than the company, an associated body corporate) that are offered as a result of being a director or the actions of being a director.
There is no infringement when the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. Duty to declare interest in proposed transaction or arrangement
The director is duty bound to inform other directors (in writing or at a directors’ meeting) of any proposed transaction or arrangement with the company. This needs to occur before any transaction takes place while it must remain accurate. If changes to the proposal occur, they must be declared to the other directors too.
There is no infringement when the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Accountants can help guide directors to support them in meeting their obligations. It is important that you understand your responsibilities and seek support when needed. Get in touch if we can help.
Written by
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
Tagged as: For - Employers
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