In light of the ongoing threats to business posed by the Covid-19 crisis, we’ve prepared the following guidance to assist directors of limited companies.
As well as updating our guidance, we’re also keeping up to date with the latest announcements over on our blog:
Director's legal duties and relaxing the wrongful trading laws to beat a Covid-19 world where we discuss the suspension of the wrongful trading regulations and what this means for businesses on the ground.
These and all our collected Covid-19 resources to date can be found in the Essential go-to resources for small businesses in a Covid-19 world
Companies are run through two bodies of people, the directors and the shareholders. The directors manage the day-to-day operations of the company on behalf of the shareholders.
This guide covers the duties of directors of private companies in England and Wales. Failure to comply with these duties could result in civil claim against the director by the company, or criminal sanctions.
What are my general duties as a director?
As a director, you must:
1. Act within your powers - You must act in accordance with the rules of the company, which are contained in the company's constitution. This includes the articles of association, as well as any relevant shareholder decisions or resolutions. You must only exercise your powers as a director for the purpose of which they were given to you.
2. Promote the success of the company - you must act in a way which you believe, in good faith, will promote the success of the company as a whole. This is the most important general duty, and means that when making decisions, you must have regard to certain considerations (which are not fully listed here). For example, you must consider the likely long-term consequences of any decision and the interests of the company's employees.
You should ensure that regular board meetings are held and that your decisions and reasons for making them are properly recorded.
3. You must exercise independent judgement - this means making your own decisions, although you may legitimately act in accordance with an agreement entered into by the company that restricts your discretion.
4. You must exercise reasonable care, skill and diligence - this includes the general knowledge, skill and experience that would reasonably be expected from someone in your position, as well as well as the general knowledge, skill and experience that you actually possess.
5. You must avoid a conflict of interests - this involves avoiding situations in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company.
This duty will not be infringed if:
a. the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
b. the situation has been pre-authorised. The articles of association may pre-authorise common conflict situations; but if not, then the director must ask the permission of the other directors or the shareholders.
6. You must not accept benefits from third parties - benefits from third parties should not be accepted if they were given because you are a director, or because you have done or not done something as a director.
7. You must declare the nature and extent of your interests in existing or proposed transactions or arrangements with the company - if you are interested in a transaction or arrangement with the company in any way, you must declare this to the other directors. For proposed transactions you must do this before it is entered into. For existing transactions, you must do this as soon as reasonably practicable. It is a criminal offence for a director not to declare an interest.
You will not infringe this duty if:
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest;
- you are unaware that you have the interest; or
- the other directors are already aware of your interest.
Transactions involving directors
Certain types of transaction involving directors require the permission of shareholders to undertake. These include 'substantial property' transactions involving a director or someone connected to them and company loans to a director. These transactions are explained fully in our other resources.
Other duties and obligations
Directors are also responsible for:
- the company's annual reports and accounts;
- ensuring compliance with health and safety obligation, as well as environmental and anti-corruption legislation;
- ensuring that they only use or disclose confidential information for the benefit of the company.
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