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Being appointed a director can be an honour but it also comes with some legal responsibilities. Many first-time directors assume the role is simply about running the business well. While that’s part of it, the law sets out certain general duties you owe as a director, and getting them wrong can mean personal liability. The good news is that the core duties are clear and, once understood, mostly reflect sensible business practice.

The seven general duties

Under the Companies Act 2006, there are seven general duties that every director must follow:

Act within your powers

You must act in accordance with the company’s constitution and use your powers only for the purposes for which they were given.

Promote the success of the company

You must act in the way you genuinely believe will help the company succeed for the benefit of its members as a whole (from the largest to the smallest).

This means considering the interests of employees, relationships with suppliers and customers, the impact on the community and environment, the company’s reputation and any long-term consequences of your decisions.

Exercise independent judgment

You must reach your own decisions and not simply do as you are told by others.

Exercise reasonable care, skill and diligence

You are expected to act as a reasonably diligent person would, bringing both the general knowledge expected in your role and any special knowledge or experience you personally have. Ignorance is not necessarily an excuse.

Avoid conflicts of interest

Steer clear of situations where your personal interests conflict, or may conflict, with the company’s. This includes including exploiting company property, information or opportunities for yourself.

Declare interests in proposed transactions

If you have a personal interest in a transaction the company is entering into, you must tell the other directors beforehand. You may also need to circulate a resolution to the members before you make a certain decision.

Don’t accept benefits from third parties.

You must not accept benefits offered from third parties because of your position or your actions as a director, such as a supplier’s kickback

What happens if you get it wrong

The consequences range from having to compensate the company to having a transaction, reversed altogether

If your conduct shows you’re “unfit” to be a director, you could be disqualified from the role for between 2 and 15 years.

Who else can bring a claim

Although your duties are owed to the company itself, others may also be able to bring a claim.

Members: A member may be able to bring an unfair prejudice claim or get permission to bring the claim on behalf of the company (known as a derivative claim.)

Creditors: If a company is heading towards insolvency and you knew, or should have realised, that there was no reasonable way of avoiding it, you could be ordered to contribute personally to the company’s assets for “wrongful trading” unless you took every step to minimise loss to creditors. You will need to be wary of when your duties might shift between the members to the creditors.

Managing the risk

None of the above should put off a capable person from taking a board seat. Companies can protect their directors through insurance and qualifying indemnities, and well-run boards keep clear records of how and why they’ve made their decisions.

The key is to understand your duties, document that you’ve thought things through properly, declare any interests early, and get advice when a decision is finely balanced or the company’s finances are under strain.

Laceys would be happy to help with your appointment and advice on the correct procedures that you should be taking to be compliant with your duties throughout your tenure as director.

For an informal conversation on Directors Duties, please contact one of our Company and Commercial team who will be happy to help.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.