What Are The Legal Duties Of Company Directors?
When you become a director of a limited company, there are seven main legal duties that you take on relating to running a company. In this post, we aim to highlight these legal duties and how you can ensure you’re doing everything above board.
1. Act within your powers
While this might seem like common sense, some directors fail to carry it out by not acting within their powers.
What this duty entails: you need to act within the rules set out in the Articles of Association.
Why you need to carry it out: the Articles of Association for a company set out the decision-making rules within a company. If directors make a decision outside of these rules, they may be forced to reverse the decision and reimburse any financial losses incurred for the company.
2. Promote the success of the company
While smaller companies may not be too concerned with this duty, companies with more than 250 employees will need to detail how they have fulfilled it in an annual report.
What this duty entails: directors must act in a way they consider would most likely bring success to the company for the benefit of its members. When making decisions, you must also consider the consequences for: various stakeholders, the environment, the reputation of the company, and the long-term success of the company.
Why you need to carry it out: this duty prevents a narrow financial view for the directors. It means they have to consider all options before making a financially sound decision that, for example, could be harmful to the environment or the reputation of the company.
3. Exercise independent judgement
When running a company, directors need to form their own view of how things should be running, rather than relying on the judgement of others.
What this duty entails: directors need to form their own views of how the company should be run and carry out these views accordingly.
Why you need to carry it out: shareholders and other stakeholders can make important decisions without worrying about whether they are promoting the success of the company. Directors need to make sure decisions are in the company's best interest, which can only be achieved if they can exercise independent judgement.
4. Exercise reasonable care, skill and diligence
When running a company, directors must act as though they are directors; they can’t just run on reputation alone.
What this duty entails: directors are expected to have the knowledge required to run a company. Also, if you have any additional knowledge, such as being a qualified accountant, you are expected to use these skills and are held in higher regard than those who are not qualified.
Why you need to carry it out: directors who do not have the knowledge required to run a company, or who solely rely on reputation, cannot make the necessary decisions for running a company.
5. Avoid conflict of interest
Directors cannot have any interests or duties that conflict with the interests and duties of the company.
What this duty entails: directors need to disclose their conflicts to other members of the board. These non-conflicted members then have to decide how to proceed with the conflict and how they can keep the board's integrity.
Why you need to carry it out: the conflict of interest may result in the board not having all the information required to make a sound decision on certain matters. When this happens, incorrect decisions can be made on behalf of the company.
6. Do not accept benefits from third parties
Directors cannot accept gifts or benefits that may affect their objectivity in running the company, for example, accepting a gift from a supplier on the provision that they will be the exclusive supplier.
What this duty entails: the director cannot accept any gifts given solely because they are a director.
Why you need to carry it out: if a director’s objectivity is affected, they may make decisions which are not in the best interest of the company as a whole.
7. Declare any interests in the transactions of the company
Directors must disclose any direct or indirect interest in any transactions relating to the company.
What this duty entails: the director must disclose their interest to other directors and the extent of the interest.
Why you need to carry out this duty: directors may endorse a certain transaction because they have an interest in it, rather than it being in the company's best interest.
For more information about the legal obligations of company directors, please check out legislation on gov.uk.
- 28 Mar 2024 - Why Does Your Company Need A Contingency Plan?
- 25 Feb 2024 - March 4th updates - Registered email and lawful purpose statement
- 01 Feb 2024 - Setting Up A Limited Company? Here’s What You Need To Know
- 15 Jan 2024 - How Do You Know If Your Business Is Doing Well?
- 13 Dec 2023 - Making Your Company Dormant