The responsibilities and duties of a company director - MLP Law

The responsibilities and duties of a company director

Becoming a director comes with a fair share of duties and responsibilities and it’s important each director does their due diligence when it comes to the company they’re about to direct. That’s why we have outlined the main key points to consider as a director, and how we may be able to help you.

The responsibilities and duties of a company director


Prior to becoming a director
Each director-to-be should do their due diligence when it comes to the company they are about to direct.

Prior to appointment, in order to make sure you are able to run the company to the best of your abilities, and that you understand the nature of the role, make sure you have a working knowledge of the company’s:

· Memorandum and Articles of Association
What are the limits on decision-making? When is shareholder approval required?

· Board and shareholders
Who are they? What are the dynamics between them?

· Governance
If part of a group, what is the structure? Any recent issues?

· Business activities
What products/services does the company provide? Who are its suppliers and customers? Check recent board minutes for developments

· Financial record
Check financial reports, strategy documents etc.

· Risk and operational management strategy and record
What plans, procedures, insurance policies etc. are in place?
 
Statutory duties
As well as understanding how the business is run, each director has legal duties and obligations to the company, as outlined under the Companies Act 2006:
· To act within their powers;
· To promote the success of the company;
· To exercise independent judgement;
· To exercise reasonable care, skill and diligence;
· To avoid conflicts of interest;
· Not to accept benefits from third parties; and
· To declare interests in proposed transactions or arrangements.

These are not exhaustive. For example, directors also have a duty of confidentiality (this outlines what information can be disclosed to the shareholders and/or the public).

Many more duties arise under various statutes and guidelines in areas such as:
· health and safety;
· anti-bribery and corruption;
· accounts and finance;
· employment law and modern slavery; and
· the maintenance of records such as company registers,

So be aware of all additional duties to which you must adhere.
 
Insolvency
In addition to the above duties, directors have additional obligations if their company is going through financial difficulty. Where a company tips towards insolvency, directors’ duties move away from the members of the company towards the creditors.

In such a situation, a director has a duty to avoid:
· Wrongful trading – Carrying on business without taking steps to minimise losses for the company’s creditors.
· Fraudulent trading – Carrying on business with the intent to defraud the company’s creditors (including deliberately ‘shutting one’s eyes’ to such activity).

Failure to comply with these duties could result in:
· personal liability to recoup such losses to the extent a court sees fit; and/or
· a Disqualification Order if the court is satisfied that the relevant director is unfit to be involved in the management of the company.
 
Liability… and how can we help?
A director will be personally liable to the Company for not complying with their statutory duties.
Shareholders will normally only have a cause of action against the Company rather than individual directors in a personal capacity. However, for acts/omissions involving:
· negligence;
· default;
· breach of duty; and/or
· breach of trust,

a shareholder can bring a ‘derivative claim’ against a director or third party. In practice, this is rare as the bar is to bring a derivative claim is set very high.

In order to minimise liability as a result of breach of duty, depending on the stage a director finds themselves at, it may be possible to:
· Protect with insurance;
· Protect with an indemnity;
· Have the company ratify the breach; and/or
· Obtain relief from the court for the breach of duty.

For help and advice on becoming a director or if you are unsure about your own situation, please speak to our Corporate team on 0161 926 9969 or email corporate@mlplaw.co.uk.

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