Directors' duties and liabilities FAQs

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.