10 duties of a company director

A company director is responsible for running a limited company on behalf of its shareholders and promoting the business’s success. The duties of directors are set out in the Companies Act 2006 and the articles of association. Further specification of the role is often included within a shareholders’ agreement and directors’ service contracts.

It is an essential and all-encompassing position that varies from business to business. Generally, however, there are 10 key duties to fulfil. In this article, we provide an overview of these responsibilities. 

Your duties as a company director

Companies operate under the control of shareholders and directors. The shareholders have ultimate control. However, they do not participate in the company’s management in their capacity as shareholders. They appoint directors to run the business on their behalf.

This means that one of the general duties of directors is to manage all important day-to-day affairs. Essentially, they must ensure that the company is managed effectively and adheres to its statutory and contractual obligations. Shareholder approval is generally only required in exceptional circumstances.

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Whilst these two roles are separate, it is not unusual for directors to be shareholders of a company, enjoying additional rights and obligations beyond those afforded by their directorship. Nevertheless, it is important to understand that the roles are distinct.

Whether you are also a shareholder or not, the 10 duties below will form the basis of your role as a UK company director.

1. Act within your powers

Company directors must carry out their roles and duties in accordance with the Companies Act 2006 and the articles of association, only exercising their powers for their proper purposes.

The articles of association is a set of rules and regulations that governs the way in which a company operates. It specifies the powers and duties of directors, the rights and obligations of shareholders, and how decisions are made.

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In many companies, the articles are supplemented by a shareholders’ agreement. This private, legally binding agreement clarifies the roles of shareholders and directors, including their rights, the extent of their authority, and who can and cannot make decisions in specific circumstances.

To fulfil their duties effectively, all directors must be familiar with the terms set out in the company’s articles, shareholders’ agreement, and any other relevant documents or contracts relating to their role or the company as a whole.

2. Promote the success of the company

Directors have a legal obligation to act in the company’s best interests. They must carry out their duties in a way that is most likely to promote the success of the business for the benefit of its shareholders.

Whilst doing so, directors must consider the consequences and impact of their decisions on employees, customers, business associates, suppliers, members of the general public, the community, and the environment. 

They must also strive to create and maintain a reputation for high standards in company business conduct.

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To demonstrate compliance with this duty, directors should document their decision-making wherever possible (for example, in meeting minutes and company resolutions), stating that consideration has been given to such factors.

3. Exercise independent judgment

Company directors should not allow their powers to be influenced or controlled by others. They must exercise independent judgment and make their own decisions.

It is perfectly reasonable (and sometimes necessary) to accept professional advice. However, they must always remain impartial, reaching their decisions independently and free from third-party pressure or personal bias.

4. Exercise reasonable care, skill, and diligence

Almost anyone can be a company director, provided they are at least 16 years old and not subject to director disqualification or bankruptcy restrictions. Moreover, by law, you do not need any specific qualifications, experience, or skills to be a director.

That said, the role carries a great deal of responsibility, so any person appointed as a company director must exercise reasonable care, skill, and diligence.

As per the Companies Act 2006, this means that a director must exercise the same level of care, skill, and diligence that a reasonably diligent person would exercise with:

• the general knowledge, experience, and skill that may reasonably be expected of any person carrying out the same duties as them in relation to the company
• the general knowledge, experience, and skill that they actually possess

No two people are the same, so it stands to reason that every director’s understanding and capabilities will be different. Nevertheless, it is expected that anyone who is appointed as a director should be able to perform the role reasonably effectively.

5. Avoid conflicts of interest

Company directors must always avoid conflicts of interest by avoiding situations that may divide their loyalties. 

This applies, in particular, to the exploitation of property, information, or opportunities in which the director’s interests (directly or indirectly) conflict with the company’s.

If any potential conflicts of interest should arise, the other directors (if any) must be informed in the first instance.

Subject to any restrictions or requirements within the company’s articles, the board of directors may authorise the conflict of interest. If they don’t have the power, the matter should be referred to the shareholders.

If a conflict situation is permitted under the articles or authorised by the board or shareholders, the director must act appropriately and continue promoting the company’s success.

6. Not accept benefits from third parties

To maintain their integrity and avoid conflicts of interest, directors must not accept benefits from any third party if they are offered to them based on their position in the company or because of the director’s doing (or not doing) something in that role.

Such conduct can give rise to expectation, misinterpretation, and suspicion, which would call into question the propriety and probity of the director and the company as a whole.

However, this duty is not infringed if the director’s acceptance of the benefit could not reasonably be regarded as being likely to give rise to any conflict of interest.

7. Disclose interests in proposed transactions or arrangements

If there is potential for a director to personally benefit from a proposed or existing transaction or arrangement entered into by the company, the nature and extent of the interest must be disclosed to the other directors (if any) and, in some cases, the company shareholders.

An example may be if a company plans to enter into a contract with a business owned by a director’s spouse or another family member or a business in which the director owns shares.

There is no need to declare an interest if it cannot reasonably be regarded as being likely to give rise to a conflict of interest or if the other directors in the company are already aware of it.

8. Maintain statutory filing and reporting obligations

To comply with UK company law, directors have a legal duty to maintain a number of limited company filing and reporting obligations. These include but are not limited to the following:

• Registering the company for Corporation Tax
• Registering for VAT and Pay As You Earn (PAYE)
• Preparing annual accounts and Company Tax Returns for HMRC
• Preparing annual accounts for Companies House
• Filing an annual confirmation statement with Companies House
• Paying business taxes in full and on time
• Keeping all necessary statutory company registers and accounting records
• Reporting any change of company details – e.g. a new registered office address, the appointment or removal of directors, a change of details for an existing director, and share allotments or share transfers
• Maintaining company addresses, signage, and stationery

Some companies appoint a company secretary to take care of these compliance duties on behalf of the director(s). However, regardless of who is tasked with carrying out such obligations, the ultimate responsibility lies with the director.

They are still legally responsible for these duties and must always ensure they are current with the company’s statutory filing and reporting requirements.

9. Comply with additional legislation and regulations

Beyond UK company law, directors and their companies may be subject to a range of additional legislation and regulations, including:

• Health and safety laws
• Employment law
• Consumer rights
• Trade descriptions
• Competition law
• General Data Protection Regulation (GDPR)
• Licensing laws
• Environmental regulations
• Food safety and hygiene
• Intellectual property
• Equality and diversity
• Product safety
• Industry-specific laws and regulations
• Legal requirements related to regulated professions

As a company director, it is your responsibility to understand the nature of the business and be aware of all laws and regulations with which the company must comply.

This is the area in which a company secretary specialises. You may find it beneficial to appoint an experienced company secretary or consult a corporate solicitor if you require expert help and guidance on such matters.

10. Report personal income

Most directors receive a salary through Pay As You Earn (PAYE), an HMRC system that most employers use as part of their payroll. Through PAYE, directors pay Income Tax, Class 1 National Insurance contributions (NIC), and any other required deductions from their salary earnings.

Many directors also receive taxable benefits from their company, while others may be entitled to dividends if they are also shareholders. If a director receives any such type of untaxed income, they must register for Self Assessment to report and pay tax on these earnings.

In this situation, directors are responsible for registering themselves with HMRC, completing a Self Assessment tax return each year, and paying the relevant taxes (e.g. Income Tax, NIC, and Dividend Tax) on any additional earnings that aren’t processed and taxed through PAYE.

How does a director’s role differ from a shareholder’s?

While it’s common for company directors and shareholders to be the same person, the rights and duties associated with these two roles are wholly distinct. 

A shareholder owns all or part of a company by taking one or more shares in the business, usually in exchange for capital investment. They are liable for company debts up to the value of their shares. In most cases, they are entitled to a percentage of the business’s profit.

Shareholders are not responsible for day-to-day decisions or management duties. They typically make decisions only in exceptional circumstances where their input is required, such as altering the articles or making changes to share capital.

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On the other hand, directors deal with all routine business matters related to running the business. They are appointed by shareholders to manage the company on their behalf and for their benefit. 

The shareholders determine a director’s rights, powers, and duties. Directors are legally responsible for ensuring that the company complies with all statutory requirements, including filing accounts, tax returns, and confirmation statements.

Unlike shareholders, directors are not generally liable for the company’s debts. However, they can be fined, prosecuted, disqualified from directorship, and held personally liable for debts or claims where they’re found to have breached their legal duties. 

The risk of liability is most prevalent during insolvency (i.e. when a company can’t pay its debts). Directors have specific duties when a company is insolvent. They must shift their priorities to creditors rather than shareholders to minimise the money the company owes and cannot repay.

Thanks for reading

So, there you have it. We’ve explained the duties of directors, how their role differs from that of company shareholders, and when directors may be held personally liable.

For more information on setting up and running a limited company, explore the 1st Formations Blog. You’ll find a wealth of information to help you succeed as a company director and small business owner.

If you have any questions about this post, please comment below. Our company formation team is also available to provide help and guidance with any company-related matters.