Duties of directors of Ltd Companies

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We often come across clients we work with who still struggle to understand the delimiters between themselves and their limited company, especially when the client is the only director and the only shareholder.

As a company director, you are an officer of the company and your limited company is governed by a set of rules that you, the director(s) must abide by.

Your general duties are owed to the company which you are a director of. The company itself can take enforcement action against a director if there has been a breach of duty although the decision to start proceedings will be made by the board or a liquidator (if the company is insolvent). A group of shareholders can also bring a claim against a director for breach of duty.

In summary, you must

  1. Act within the powers set in the constitution
  2. promote the success of the company
  3. Exercise independent judgement
  4. exercise reasonable care, skill and judgement
  5. avoid conflict of interest (and threats to your objectivity)
  6. Keep records

Act within the powers given to you

As a director of a company, you must act within its constitution. It is important to familiarise yourself with the rules governing your limited company and understand the powers within which you can act.

If a director acts outside the powers given by the company’s constitution, their decision could be void and they may have to compensate the company for any financial losses as a result of their decision.

A company’s constitution is mostly covered by its articles of association, which contains a set of rules for your company and your board.

Most small businesses will use the model articles, more complex agreements or set ups will required tailored versions created with the help of a legal advisor.

Promote the success of the company

promoting the success of the company is a well known responsibility amongst the business owners we meet.

this duty requires that a director acts in a way that they consider, in good faith, will most likely promote the success of the company for the benefit of its members as a whole. Directors must consider the consequences of their decisions on all stakeholders (employees, suppliers, customers, communities..) and the impact on the environment and the reputation of the company.

Exercise independent judgement

As a director, you must exercise independent judgement and make your own decisions based on your own view. You cannot simply implement the commands of other parties, nor should you avoid making your own decisions by relying on the expertise of others.

Exercise reasonable care, skill and diligence

You must exercise the same care, skill & diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that could reasonably be expected from a person carrying out the director’s functions.

Directors with specific professional training or skills (such as a lawyer or accountant) are held to a higher standard in related issues than less qualified colleagues.

Avoid conflicts of interest and personal benefits

Directors must avoid / manage conflicts of interest which may affect their objectivity.

Some situations may impose multiple claims on a director’s attention or objectivity, those situations must be disclosed to the board which will then decide how to manage the conflict.

Directors have a statutory duty to disclose any direct or indirect interest in proposed or existing transactions or arrangements with the company. In particular, the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.

Keeping a record

For directors to prove that they have fulfilled their duties, they must keep records. The main purpose of the minutes of board meetings is to provide a record of the board’s decision-making process. The minutes must be kept for 10 years by law.

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