A short reminder of the duties and responsibilities of directors. More extensive information is contained in ICAEW Guidance; the links on this page will direct you to the relevant sections of that document.
You will normally know if you are a director as you will have formally accepted the position. However, if you exercise sufficient influence over a company or act as if you are a director, you may be treated as a director for certain purposes even if not formally appointed.
Certain people are prohibited from acting as a director, including persons under 16 years of age, bankrupts, disqualified persons and a person acting as auditor of the company. (regulation 9). While there is no mandatory qualification required to be a director, a director is required to perform the duties outlined below and so must be capable of doing so.
The Companies Act 2006 sets out the seven general statutory duties of a director. These are listed below with some additional commentary.
In addition to these duties, a director has duties:
Of course the company itself has numerous legal duties. These include duties under the Companies Act itself, such as to maintain full and accurate accounting records and to make relevant filings at Companies House (included the annual accounts). It also has to comply with all other laws and regulations applicable to it (such as tax and employment laws). As the company acts through the board of directors, the directors are responsible for ensuring compliance by the company. (regulation 29)
In certain cases, directors are made specifically liable for breach (regulation 68), for instance, in the case of accounting records, every officer of the company is liable to a fine, imprisonment or both .
A director may also be an employee of the company (and is then typically referred to as an ‘executive director’). The general duties of directors outlined above apply equally to executive directors, but an executive director will also be bound by the terms of his employment contract.
The general duties outlined above are owed by the director to the company and only the company (or in limited circumstances, the shareholders) will be able to enforce them as such.
Remedies available for breach of these duties include injunctions (to prevent further breach), setting aside an affected transaction (eg entered into in breach of requirements on conflict), restoration of company property held by the director and damages.
A breach may also be grounds for termination of an executive director’s service contract.
This note only covers the general duties of directors under the Companies Act 2006 and it is beyond the scope of this note to identify all circumstances where a director may be personally liable for acting as a director. By way of illustration only:
A director of a company cannot be exempted from liability (regulation 52) in connection with any negligence, default, breach of duty or breach of trust in relation to the company. A director cannot, indemnified by the company against those liabilities (regulation 53-54) unless the indemnity meets specific statutory criteria. The prohibition does not prevent a company from providing 'Directors and Officers' (D&O) insurance for directors, but this does not exonerate them from their obligations.
A company may generally ratify acts carried out by a director in breach of duty. Appropriate procedures need to be followed for ratification and not all acts can be ratified (for instance, fraudulent acts of the director). A court may relieve a director if it considers that the director has acted both honestly and reasonably and that he ought fairly to be excused. (regulation 55).
This is a general overview of general duties of directors of limited liability companies under the Companies Act 2006. Different or additional issues may arise for other types of entity or for companies operating in regulated or specific sectors (eg banks and charitable companies) (regulation 2).
A director may have numerous other responsibilities in relation to a company as noted in the Guidance. These arise, for instance, in arrangements between the director and the company, share dealing (including in relation to insider dealing), financial reporting and accounting, share issues and winding up. Additional requirements apply to listed companies or companies traded on a regulated market. Readers are referred to the Guidance on these matters and also advised to check the up-to-date position as appropriate as there have been changes to law and regulation since the Guidance was issued.
This is not to be relied upon as advice in relation to any particular directorship. Interpretation of the law often depends upon the particular circumstances and if directors are in difficulty over interpretation of their duties they should seek independent legal or other professional advice, or contact ICAEW’s Technical Enquiries helpline or Ethics helpline services.
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