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Becoming a director can be a huge step in your career, but it also comes with legal obligations and responsibilities. If you’re reading this, you’re likely thinking about becoming a director or you’ve just become one – this article is designed to dissipate some of your doubts around your director responsibilities.
All directors of limited companies must act in accordance with the Companies Act 2006, which states seven main responsibilities of a company director. These responsibilities are the same for all directors, regardless of whether you’re not currently active in your director role, you act as a director but haven’t been formally appointed, you control a board of directors without being on it or if someone else tells you what to do.
This article will go through each one, explaining what they mean and what a director needs to do to uphold them.
1. Company’s constitution
Directors must act under the company’s constitution of which the most important part is its articles of association. These are written rules about running the company and are agreed by the members, directors and the company secretary.
Companies House provides model articles of association for limited companies that you can use, or you can create your own with the help of a legal advisor.
As a director, it’s important to familiarise yourself with the contents of the articles of association as they detail what powers you have, decision making and otherwise, as well as why those powers are important.
If you were to act beyond these powers, the decisions you made could be reversed and you may even have to compensate the company for any financial losses. This is why it’s important to think about buying directors’ and officers insurance as this would be covered under your policy.
2. Promote the success of the company
This is probably the most well-known of the seven responsibilities. It involves acting in the best interests of the company and promoting its success to the benefit of its members, such as shareholders.
As part of this, directors must also take into account the consequences of their decisions and long-term interests on:
- The community
- The environment
- Business associates
- Members of the public
- The company’s reputation
Of course, as a director, you’ll likely want to shout about the success of the company, but its success relies heavily on the decisions made, which have to be justified by the interests of the company.
This changes if the company becomes insolvent, as your responsibilities will then apply towards the creditors – which is anyone owed money by the company – not the company itself.
3. Independent judgement
The third point also relates to decision making. It states that directors should make informed decisions and must not allow their powers to be influenced or controlled by other people or third parties, such as shareholders.
Directors can accept advice, but they should not rely on knowledge or judgement from other directors or experts – the final decision on the company’s activities must be based on independent judgement.
4. Exercise reasonable care, skill and diligence
Gone are the days when directors could earn their status through name or reputation alone. These days, directors are expected to use their relevant experience, skills and expertise to perform their duties to the best of their ability.
Those with specific knowledge or qualifications, such as lawyers or accountants, are also held to a higher standard than those less qualified.
5. Avoid conflicts of interest
The following three responsibilities relate to conflicts of interest and how directors should manage or avoid them.
Number five involves relaying to fellow board members any time the director’s loyalties or attention has been divided. The non-conflicted board members will then decide how to manage the conflict following a process set out in the articles of association.
Some examples of conflicts of interest could be:
- The business or personal relationship of the director with those who are affected by the company’s activities
- The director is considering taking personal advantage of property, information or opportunities that belong to the company
- The director is considering accepting gifts or benefits from third parties
- The director has a direct or indirect interest in proposed transactions or arrangements with the company
Disclosing any of these conflicts of interest still apply if you’re no longer a director.
6. Third-party benefits
As mentioned in responsibility five, a director shouldn’t accept any benefits or gifts that are offered by a third party, as this can cause a conflict of interest. Accepting gifts or benefits could create suspicion, expectation or misinterpretation and question the expected behaviour or moral standards of the director and the company.
The company may accept reasonable benefits such as corporate hospitality, as long as it’s absolutely clear that there is no conflict of interest. However, any and all benefits or gifts offered should be disclosed to the board.
7. Interests in a transaction
Directors must disclose if they would personally benefit from any transaction or arrangement that the company makes. An example would be if the company struck up a contract with a business owner that the director knew personally§1§.
Keeping a record
To maintain that directors are adhering to these responsibilities, it’s vital to take minutes during members of the board meetings. These provide vital evidence that directors acted in accordance with their responsibilities.
As some claims could be made in years to come, it’s every company’s legal obligation to keep these records for at least 10 years. These will act as proof that you fulfilled your duties and did your utmost to respect your responsibilities.
Alongside board meetings, directors are also required to maintain and submit company files and reports. These include, but are not limited to:
- Corporation tax, VAT and PAYE
- Annual accounts
- Confirmation statements
- Business taxes
- Changes to the company’s details
Finally, there are some additional duties that directors should be aware of, including:
- Not misusing the company’s property
- Ensuring the company’s affairs are kept confidential
- Reporting on personal income, dividends and taxable benefits
Directors should also comply with other legislation and regulations, which can include:
- Health and safety laws
- Employment law
- Consumer rights
- Competition law
- Licensing laws
- Environmental regulations
- Intellectual property
- Equality, diversity and inclusion
- Product safety
- Industry-specific laws and regulations
- Legal requirements related to regulated professions
With great power...
As you can see, becoming a director is no joke. It involves a lot of work, mindfulness of actions and consideration for multiple parties.
If you are a director or you’re considering becoming one, you might want to consider directors’ and officers' insurance. If you were to act outside of these responsibilities, which caused you or the company to suffer a fine or financial loss, D&O insurance could cover the compensation. It also covers you personally for claims such as breaching health and safety laws, allegations of cyber-bullying, misrepresentations in a pitch deck, or errors in financial reporting.
To learn more about your responsibilities as a company director, you can browse the government’s useful videos, webinars and tool kits and sign up to emails for any important updates or reminders.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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