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Directors' duties and liabilities

This page sets out the principal duties directors have and the main liabilities they may face, both civil and criminal, if they breach those duties.

Except where otherwise stated, the content of this page applies to private companies in England and Wales. Additional considerations apply to public companies, especially if listed.

If you have any further queries about directors’ duties, please contact Scott Preece.

Frequently Asked Questions

  • What are the requirements to be eligible as a director of a company and how many are needed?

    Company law requires that private companies must have at least one director (public companies must have two). Directors are usually appointed by the directors or shareholders in accordance with provisions in the company’s articles (and do not have to live in the UK). A director may not be an undischarged bankrupt, or subject to certain insolvency procedures, nor may they be subject to an order from the court disqualifying them from being a director.

    The board of directors is responsible for management of the company’s affairs on behalf of its shareholders.

  • Do we need to send the personal details of the company’s directors anywhere?

    The names of a company’s directors must be notified to the Registrar of Companies (the executive agency is known as “Companies House” in the UK) and are available to all on the Companies House website, along with each director’s address for service (this can be linked to the company’s registered office) and month and year of birth. The company must also make the director’s service contract available for inspection by shareholders.

  • What are the main duties of a director?

    The directors of a company have seven general duties under the Companies Act 2006 (which forms the primary source of UK company law). These duties, which are owed by the directors to the company and apply to executive and non-executive directors, are as follows:

    1. A director must act within their powers. This duty serves to limit what directors can do: they must act in accordance with the company’s constitution (its articles of association and any relevant decision or resolution of the company’s members), and they may exercise their powers only for the purpose for which those powers are conferred.
    2. A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. This may be considered the most important duty of a director, but it does not exclude all other considerations. In considering what would promote the success of the company for the benefit of its shareholders, the directors must also have regard to the following:
      • the long-term consequences of any decision;
      • the interests of the company’s employees;
      • the need to foster the company’s business relationships with suppliers, customers and others;
      • the impact of the company’s operations on the community and the environment;
      • the desirability of the company maintaining a reputation for high standards of business conduct; and
      • the need to act fairly as between members of the company.

     

    1. A director must exercise independent judgement, though they may legitimately act in accordance with an agreement duly entered into by the company that restricts the directors’ discretion.
    2. A director must exercise reasonable care, skill and diligence, using the general knowledge, skill and experience that may reasonably be expected of a person in the director’s position as well as the actual knowledge, skill and experience that the particular director has.
    3. A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies particularly to the exploitation of any property, information or opportunity. However, the duty is not infringed if the situation cannot reasonably be regarded to give rise to a conflict of interest, or if the matter has been authorised by the directors. The company’s constitution may allow a director to vote on a matter in which they have an interest, provided that interest has first been declared.
    4. A director must not accept a benefit from a third party conferred by reason of their being a director or doing (or not doing) anything as a director. This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. The company may include in its constitution (such as its articles of association) a provision enabling directors to receive corporate hospitality without breaching this duty.

    A director must declare the nature and extent of their interest to the other directors, if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company. The director need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest. A director must also declare the nature and extent of any interest where they in any way, directly or indirectly, interested in a transaction or arrangement that has already been entered into by the company. It is a criminal offence, punishable by a fine, for a director not to declare an interest in an existing transaction or arrangement.

  • Are there any other duties a director needs to be aware of?

    Directors also owe a duty of confidentiality to the company. This means that, where a director has been appointed by a shareholder, it is necessary for the company’s constitution to provide that the director may disclose confidential information about the company to the appointing shareholder

  • Is a director subject to personal liability?

    Yes. Although a company is treated as a distinct legal entity, the law in England and Wales imposes personal liability on the directors of a company in various ways.

    A director’s personal liability can arise due to breaches of health and safety legislation or environmental legislation, for example, as well as breach of a director’s statutory and fiduciary duties.

    In certain circumstances, the company may bring a civil claim against the director. A claim may also be brought by a shareholder, acting in accordance with the duty to promote the success of the company, though any damages are payable to the company.

    If the claim is successful, the director will have to compensate the company for its loss. The court may relieve a director from liability if it appears that they acted reasonably and that, having regard to all the circumstances of the case, they ought fairly to be excused.

    It is also possible for a director to incur personal criminal liability as a result of certain breaches or offences that committed by a company.

  • Is there a way of being insured against liability of a director?

    Yes, a company may purchase insurance against any liability of a director in connection with any negligence, default, breach of duty or breach of trust in relation to the company. It is advisable for a company to have directors’ indemnity insurance in place.

  • How long do these directors’ duties apply for?

    Certain duties continue to apply to a person after they have ceased to be a director. These include the duty to avoid conflicts of interest in relation to the exploitation of any property, information or opportunity of which the person became aware at a time when they were a director.

  • What about de facto directors and shadow directors?

    These duties apply to any person occupying the position of director, by whatever name called. This includes de facto directors, that is, persons who act as if they are directors, and are treated as such by the board, but have not been validly appointed. Thus a senior manager, if they act as a director, will not escape liability for their acts or omissions even if they have not been appointed formally.

    To the extent that they are capable of so applying, the duties also apply to a shadow director, that is a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

  • What is a substantial property transaction and how does it affect directors?

    Special rules apply where a company is to enter into a substantial property transaction with a director. A company may not enter into an arrangement under which a director, or a person connected with the director, acquires from the company directly or indirectly a substantial non-cash asset, unless the arrangement has been approved by the company’s shareholders.

    ‘Substantial’ here means having a value of more than £100,000 or 10% of the company’s value (and is more than £5,000). A ‘connected person’ includes members of the director’s family (spouse, civil partner, partner, children or step-children, parents, or partner’s children or step-children who live with the director and are under 18), and another company or other body corporate where the director owns more than 20% of the share capital or is entitled to exercise more than 20% of the voting power.

    If shareholder approval for the transaction is not given, the director is liable to account to the company for any gain made from the transaction.

  • Are there any issues with loans to directors?

    Yes, a company may not make a loan to a director without shareholder approval. Again, if shareholder approval is not obtained, the director concerned and any other directors are liable to account to the company for any gain made from the transaction and to indemnify the company for any loss suffered.

  • What happens if the company faces financial difficulty?

    When a company is insolvent, the directors’ usual duty to promote the success of the company for the benefit of its members as a whole is displaced by a duty to act in the interests of the company’s creditors. A company is considered to be insolvent if it is unable to pay its debts as they fall due (cash-flow insolvent), or if the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (balance-sheet insolvent). If a company is in financial difficulty, therefore, it is important that the directors take appropriate professional advice to determine whether insolvency considerations apply.

    Directors (including de facto directors – see below) may have to make financial contributions to an insolvent company if they are found to be liable for any of the following:

    1. Misfeasance – this applies if a director, or any person who has been concerned or has taken part in the promotion, formation or management of the company, has misapplied or retained, or become accountable for, any money or other property of the company. In such a case, the court may compel the director or manager to repay, restore or account for the money or property, with interest. Further, if the director or manager has been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company, they may have to contribute to the company’s assets by way of compensation such sum as the court thinks just.
    2. Fraudulent trading – if a company is wound up and it appears that any business of the company has been carried on with the intent to defraud creditors or for any fraudulent purpose, any person, including a director, who was knowingly party to the fraudulent trading may be liable to make such contributions to the company’s assets as the court thinks proper.
    3. Wrongful trading – even where there has been no intent to defraud, a director of a company may have to contribute to the assets of the company if, before the company went into insolvent liquidation, they knew or ought to have concluded that there was no reasonable prospect that the company would avoid liquidation. A director may incur such a liability for wrongful trading without dishonesty, though it is a defence if the director took every step that they ought to have taken with a view to minimising the potential loss to the company’s creditors.
  • Are there any criminal offences for which a director (of an insolvent company) can be liable?

    There are several criminal offences for which the directors of an insolvent company may be liable. The following offences may be punished by imprisonment or a fine, or both:

    1. Fraud in anticipation of winding up, etc – a director commits an offence if a company is wound up and the director has, during the previous twelve months:
      • concealed or fraudulently removed any part of the company’s property;
      • concealed, destroyed, mutilated, falsified or made any false entry in any of the company’s papers, or fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s property or affairs (or is privy to any other person doing such things); or
      • pawned, pledged or disposed of any property obtained but not paid for by the company (unless in the ordinary way of business).
    2. Transactions in fraud of creditors – a director commits an offence if, during the five years before a company is wound up, they have made any transfer of the company’s property with the intent to defraud the company’s creditors.
    3. Misconduct in course of winding up – when a company is being wound up, a director commits an offence if they do not disclose and deliver up to the liquidator all the company’s property, books and papers, unless they had no intent to defraud.
    4. Falsification of company’s books – a director commits an offence if they destroy, mutilate, alter or falsify any books, papers or securities, or are privy to the making of any false or fraudulent entry in the company’s books, with the intent to defraud any person.
    5. Material omissions from statement relating to company’s affairs – when a company is being wound up, a director commits an offence if they make any material omission in any statement relating to the company’s affairs, unless they can prove they had no intent to defraud.
    6. False representations to creditors – when a company is being wound up, a director commits an offence if they make any false representation or commit any other fraud for the purpose of obtaining the consent of the company’s creditors to an agreement with reference to the company’s affairs.
  • Can you be disqualified as a company director?

    Whether or not they have committed an offence, the court may disqualify a person from being a director, or from being concerned or taking part in the promotion, formation or management of a company, if their conduct as a director (whether or not they have been formally appointed as such) makes them unfit to be concerned in the management of a company.

    Conduct here includes any breach of fiduciary duty, misapplication of funds, failure to keep proper records, and transactions intended to avoid debt, though a director should not be disqualified for ordinary commercial misjudgement. A person may be disqualified for a period of between two and fifteen years.

    It is a criminal offence to breach a disqualification order, and a person who acts a director in contravention of a disqualification order may be personally liable for all the debts of the company incurred while they were so acting.

  • What administrative and filing requirements must a director be aware of?

    The directors of a company should ensure that the company complies with statutory requirements as to filings at Companies House. These include the duty to file annual accounts and an annual return, as well as filings reflecting any change in the company’s share capital or board of directors, including a change to any director’s particulars.

    The directors should also ensure that the company’s statutory registers, including its registers of members, allotments, transfers, directors and directors’ residential addresses, are kept up to date, and that statutory records, such as minutes of meetings and shareholders, are kept.

    An offence, punishable by a fine, is committed by the company and every director or other officer of the company who is in default if any required filing is not made to the Registrar of Companies within the period specified, or if the company’s registers and records are not properly kept.

  • Are there any other legal duties that a director needs to adhere to?

    The directors should ensure that the company pays tax and national insurance to HMRC (the main department of the UK Government responsible for, amongst other matters, the collection of taxes) when due.

    A director may be liable if an employment-related claim is brought against the company, such as a claim for unfair dismissal or discrimination.

    Directors should ensure that the company acts according to any applicable law.

  • What are the advantages and disadvantages to being a director?

    The principal advantage to being a director, as opposed to being a senior manager who is not a director, is that a seat on the board gives a director full information and voting rights concerning the most important decisions to be taken about the company’s affairs. In general, directors are content for their appointment to be a matter of public record in return for the status and prestige that a directorship brings. In return, directors may in certain circumstances face significant liabilities if they breach the duties they owe to the company. Even if not formally appointed, however, a senior manager may still be liable for failing to fulfil a director’s duties if they exercise a director’s functions.

  • Do you have any practical steps for avoiding liability as a director?

    Good practice for directors includes the following:

    1. holding regular board meetings and ensuring decisions are properly recorded, with their reasons;
    2. ensuring directors and shareholders are properly informed about the company, its articles, any shareholders’ agreement, and the company’s finances;
    3. putting in place proper procedures for areas such as employees, health and safety and accounting, reviewing them regularly and taking appropriate advice as necessary;
    4. ensuring all interests are declared and all necessary approvals obtained for any contracts between a director and the company; and
    5. ensuring adequate directors’ liability insurance is in place.

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