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In this bitesize guide, we outline the duties of company directors in the UK, along with the impact of COVID-19 on their responsibilities and the potential for reform.
Companies and directors
A company is a separate legal entity to individuals, sole traders and partnerships, is controlled by its directors and owned by the shareholders and members. As directors manage and control the business of the company, safeguards are in place to ensure that directors act in the best interests of the company and do not put their own interests ahead of the company’s interests.
What are a director's duties to a company?
Directors in the UK owe various duties towards the company under the Companies Act 2006.
1 Act within the powers conferred by the company’s constitution, contained in the Articles of Association.
2 Promote the success of the company.
3 Exercise independent judgement when managing the company.
4 Exercise reasonable care, skill and diligence when carrying out their role.
5 Avoid conflict of interests, both in respect of their own interests and any other companies that they may have an interest in.
6 Not accept benefits or bribes.
7 Declare any interest that they may have in transactions to which the company is party to.
Who are the duties owed to?
The aforementioned duties are owed to the company, and as such, in the majority of cases, only the company can enforce these duties. That being said, shareholders and members are able to bring a claim on behalf of the company where directors have breached a duty.
Can a director obtain relief from liability?
Under the Companies Act 2006, where a director is found to be in breach of a duty, companies are unable to exempt or indemnify directors for losses as a result of this breach. Companies can, however, take the following steps where a director is accused (as opposed to being found liable) of any breach:
- A director can receive an indemnity from the company in relation to their costs incurred in making any application to court for relief from the breach. However, a director must repay all costs if this application is unsuccessful. The director must also ensure that the company does not create financial problems for itself when funding any costs.
- Ratification by the company may be possible where there has been a breach of the duties in relation to specific director actions. Where this is the case, a decision to ratify must be taken by company members. Such ratification is only available in very limited cases.
Directors' duties and breach is a complex area of law and leads to many claims for breach of these duties. We would strongly advise that legal advice is taken at a very early stage to minimise any risk to the director.
The impact of COVID-19
Most companies and directors have felt the impact of COVID-19, with directors needing to be extra mindful of their duties post-lockdown. The main duty to be mindful of would be to promote the success of the company in light of the economic impact of the pandemic.
Directors can take the following very simple steps to comply with their duties and promote the success of the company:
- Review all contracts with suppliers and customers and to check for payment and delivery terms.
- Ensure a proper credit control system is in place to check the accuracy of invoices when issued and to keep on top of payments to maintain cash flow.
- Speak to an insurance broker about adequate insurance for the company and the directors.
- Carry out regular reviews and checks on the financial position of the company to ensure that the company is not trading at a loss. Directors also owe duties to creditors of the company should the company be trading whilst unable to pay its debts.
Potential for reform
It is always important to be aware of any recent reforms in relation to directors' responsibilities. A notable proposal for reform comes from the Department for Business, Energy & Industrial Strategy (BEIS), who on 18 March 2021, published a consultation paper on restoring trust in audit and corporate governance. Part of these reforms include establishing a new regulator known as the Auditing, Reporting and Governance Authority (ARGA).
Of particular relevance is the proposed reforms in relation to directors and corporate reporting.
Such proposals suggest imposing more stringent accountability on directors through introducing an array of new duties to manage risk and deal with anti-fraud measures.
The consultation paper also contained proposals to limit director bonuses where a company has collapsed. In addition, directors may be required to publish an annual resilience statement on how the company is mitigating risks. In this regard, there is likely to be stronger disclosure and attestation requirements expected of directors regarding their dividends and capital maintenance.
Lastly, the ARGA may also be given stronger enforcement powers where a director has breached their duties.
United Kingdom