Directors’ responsibilities

The posi­tion of direc­tor brings both rewards and respon­si­bil­i­ties upon an indi­vid­ual.

Whether you are appoint­ed to the Board of the com­pa­ny you work for or you are involved in estab­lish­ing a new busi­ness and take on the role of direc­tor you will feel a sense of achieve­ment.

How­ev­er the office of direc­tor should not be accept­ed light­ly. It car­ries with it a num­ber of duties and respon­si­bil­i­ties. We sum­marise these com­plex pro­vi­sions below.

Companies

You can under­take busi­ness in the UK as either:

• an unin­cor­po­rat­ed enti­ty, i.e. a sole trad­er or a part­ner­ship or
• an incor­po­rat­ed body.

An incor­po­rat­ed busi­ness is nor­mal­ly referred to as a com­pa­ny. Although there are lim­it­ed lia­bil­i­ty part­ner­ships, unlim­it­ed com­pa­nies and com­pa­nies lim­it­ed by guar­an­tee, the vast major­i­ty of com­pa­nies are lim­it­ed by shares. This means the lia­bil­i­ty of share­hold­ers is lim­it­ed to the val­ue of their share cap­i­tal (includ­ing any unpaid).

A lim­it­ed com­pa­ny can be a pri­vate or pub­lic com­pa­ny. A pub­lic com­pa­ny must include ‘pub­lic’ or ‘plc’ in its name and can offer shares to the pub­lic.

The respon­si­bil­i­ties and penal­ties for non-com­pli­ance of duties are more oner­ous if you are a direc­tor of a pub­lic com­pa­ny.

Directors

When you are appoint­ed a direc­tor of a com­pa­ny you become an offi­cer with exten­sive legal respon­si­bil­i­ties. For a direc­tor of an incor­po­rat­ed body, the Com­pa­nies Act 2006 sets out a state­ment of your gen­er­al duties. This state­ment cod­i­fies the exist­ing ‘com­mon law’ rules and equi­table prin­ci­ples relat­ing to the oblig­a­tions of com­pa­ny direc­tors that have devel­oped over time. Com­mon law had focused on the inter­ests of share­hold­ers. The Com­pa­nies Act 2006 high­lights the con­nec­tion between what con­sti­tutes the good of your com­pa­ny and a con­sid­er­a­tion of its wider cor­po­rate social respon­si­bil­i­ties.

The leg­is­la­tion requires that direc­tors act in the inter­ests of their com­pa­ny and not in the inter­ests of any oth­er par­ties (includ­ing share­hold­ers). Even sole director/shareholder com­pa­nies must con­sid­er the impli­ca­tions by not putting their own inter­ests above those of the com­pa­ny.

The aim of the cod­i­fi­ca­tion of direc­tors’ duties in the Com­pa­nies Act 2006 is to make the law more con­sis­tent and acces­si­ble.

The Act out­lines sev­en statu­to­ry direc­tors’ duties, which also need to be con­sid­ered for shad­ow direc­tors. These are detailed below.

Duty to act within their powers

As a com­pa­ny direc­tor, you must act only in accor­dance with the company’s con­sti­tu­tion, and must only exer­cise your pow­ers for the pur­pos­es for which they were con­ferred.

Duty to promote the success of the company

You must act in such a way that you feel would be most like­ly to pro­mote the suc­cess of the com­pa­ny (its long-term increase in val­ue), for the ben­e­fit of its mem­bers as a whole. This is often called the ‘enlight­ened share­hold­er val­ue’ duty. How­ev­er, you must also con­sid­er a num­ber of oth­er fac­tors, includ­ing:

• the like­ly long-term con­se­quences of any deci­sion
• the inter­ests of com­pa­ny employ­ees
• fos­ter­ing the com­pa­ny’s busi­ness rela­tion­ships with sup­pli­ers, cus­tomers and oth­ers
• the impact of oper­a­tions on the com­mu­ni­ty and envi­ron­ment
• main­tain­ing a rep­u­ta­tion for high stan­dards of busi­ness con­duct
• the need to act fair­ly as between mem­bers of the com­pa­ny.

Duty to exercise independent judgment

You have an oblig­a­tion to exer­cise inde­pen­dent judg­ment. This duty is not infringed by act­ing in accor­dance with an agree­ment entered into by the com­pa­ny which restricts the future exer­cise of dis­cre­tion by its direc­tors, or by act­ing in a way which is autho­rised by the company’s con­sti­tu­tion.

Duty to exercise reasonable care, skill and diligence

This duty cod­i­fies the com­mon law rule of duty of care and skill, and impos­es both ‘sub­jec­tive’ and ‘objec­tive’ stan­dards. You must exer­cise rea­son­able care, skill and dili­gence using your own gen­er­al knowl­edge, skill and expe­ri­ence (sub­jec­tive), togeth­er with the care, skill and dili­gence which may rea­son­ably be expect­ed of a per­son who is car­ry­ing out the func­tions of a direc­tor (objec­tive). So a direc­tor with sig­nif­i­cant expe­ri­ence must exer­cise the appro­pri­ate lev­el of dili­gence in exe­cut­ing their duties, in line with their high­er lev­el of exper­tise.

Duty to avoid conflicts of interest

This dic­tates that, as a direc­tor, you must avoid a sit­u­a­tion in which you have, or may have, a direct or indi­rect inter­est which con­flicts, or could con­flict, with the inter­ests of the com­pa­ny.

This duty applies in par­tic­u­lar to a trans­ac­tion entered into between you and a third par­ty, in rela­tion to the exploita­tion of any prop­er­ty, infor­ma­tion or oppor­tu­ni­ty. It does not apply to a con­flict of inter­est which aris­es in rela­tion to a trans­ac­tion or arrange­ment with the com­pa­ny itself.

This clar­i­fies the pre­vi­ous con­flict of inter­est pro­vi­sions, and makes it eas­i­er for direc­tors to enter into trans­ac­tions with third par­ties by allow­ing direc­tors not sub­ject to any con­flict on the board to autho­rise them, as long as cer­tain require­ments are met.

Duty not to accept benefits from third parties

Build­ing on the estab­lished prin­ci­ple that you must not make a secret prof­it as a result of being a direc­tor, this duty states that you must not accept any ben­e­fit from a third par­ty (whether mon­e­tary or oth­er­wise) which has been con­ferred because of the fact that you are a direc­tor, or as a con­se­quence of tak­ing, or not tak­ing, a par­tic­u­lar action as a direc­tor.

This duty applies unless the accep­tance of the ben­e­fit can­not rea­son­ably be regard­ed as like­ly to give rise to a con­flict of inter­est.

Duty to declare interest in a proposed transaction or arrangement

Any com­pa­ny direc­tor who has either a direct or an indi­rect inter­est in a pro­posed trans­ac­tion or arrange­ment with the com­pa­ny must declare the ‘nature and extent’ of that inter­est to the oth­er direc­tors, before the com­pa­ny enters into the trans­ac­tion or arrange­ment. A fur­ther dec­la­ra­tion is required if this infor­ma­tion lat­er proves to be, or becomes either incom­plete or inac­cu­rate.

The require­ment to make a dis­clo­sure also applies where direc­tors ‘ought rea­son­ably’ to be aware of any such con­flict­ing inter­est.

How­ev­er, the require­ment does not apply where the inter­est can­not rea­son­ably be regard­ed as like­ly to give rise to a con­flict of inter­est, or where oth­er direc­tors are already aware (or ‘ought rea­son­ably to be aware’) of the inter­est.

Companies House Reform

As of 8 April 2025, com­pa­ny direc­tors are required to ver­i­fy their iden­ti­ty in order to file accounts with the reg­is­trar or oth­er­wise inter­act with Com­pa­nies House. This can be done direct­ly with the reg­is­trar or via an Autho­rised Cor­po­rate Ser­vices Provider (ACSP).

Enforcement and penalties

The Com­pa­nies Act states that they will be enforced in the same way as the Com­mon Law, although under Com­pa­ny Law. As a result, there are no penal­ties in the Com­pa­nies Act 2006 for fail­ing to under­take the above duties cor­rect­ly.

Enforce­ment is via an action against the direc­tor for breach of duty. Cur­rent­ly such an action can only be brought by:

• the com­pa­ny itself (the Board or the mem­bers in a gen­er­al meet­ing) decid­ing to com­mence pro­ceed­ings; or
• a liq­uida­tor when the com­pa­ny is in liq­ui­da­tion.
• an indi­vid­ual share­hold­er can take action against a direc­tor for breach of duty. This is known as a deriv­a­tive action and can be tak­en for any act of omis­sion (involv­ing neg­li­gence), default or breach of duty or trust.

Where the com­pa­ny is con­trolled by the direc­tors these actions are unlike­ly.