A director’s legal duties can be somewhat of a burden and the penalties for breaching them can be tough. However, provided directors have a good understanding of their role, the risk of committing a breach of duty can be avoided.

Paul Mason of Abbey Tax provides an outline of some of the duties and responsibilities of directors of small companies (whether or not they are the sole director/shareholder).

Directors are in a position of trust

The key point and foundation stone of being a director is that they are in a position of trust, controlling other people’s money. Therefore, their overriding duty is to act honestly and in good faith for the benefit of the company. The duties of a director vary depending on the Articles of the company and changing legislation and case law, but this duty of trust is a constant.

Directors must act for a proper purpose

Directors must consider all relevant factors before taking a decision and must not use their powers for purposes other than for those which they were given.

Directors must not allow their interests to conflict with those of the company

Any conflicts of interest should be disclosed to the board. A director may need to be excluded from voting on any issue in which he or she has a particular interest.

Directors have a duty not to make a secret profit

A director can only keep profits if the company’s members (shareholders) agree to it being retained.

Directors must exercise a reasonable degree of skill given their knowledge and experience

This has an element of subjectivity and is why case law can alter what is considered to be reasonable. It might, for example, be reasonable to expect an executive director who works in the business to have a higher duty of care than a non-executive director (albeit legally we seem to be moving towards a time where a greater degree of care is expected of non-executive directors than has been the case previously).

Directors should not allow a company to continue trading whilst insolvent

A director has a duty to minimise the potential loss to the company's creditors and failing to do so could result in the director being required to make a contribution to the company's assets. As we know, directors can be required to pay the tax or National Insurance which their company owes if they are deemed to have acted negligently.

Directors are responsible for maintaining the statutory books and registers of the company

It is the director’s responsibility to ensure that the books and registers of the company are sufficient to record all of the company’s transactions, allowing accurate accounts and returns to be filed with bodies such as HMRC and Companies House.

Therefore directors (not their accountants and professional advisers) are responsible for signing off corporation tax, VAT, PAYE and other returns which are submitted to HMRC. There may be circumstances where HMRC will pursue a director if tax owed by the company cannot be paid due to the company being allowed to trade fraudulently or negligently.

Directors have a responsibility to maintain and must inform Companies House when changes are made to the following registers:

  • Change in location of the registered office
  • Allotment of shares
  • Increases and alterations to authorised share capital
  • Purchase by a company of its own shares
  • Changes in directors or secretaries
  • Certain ordinary resolutions e.g. removal of a director or auditor
  • All special and extraordinary resolutions
  • Creation of a charge over a company’s assets

It is, of course, possible to outsource some of these functions, but please remember this does not make directors any less responsible for ensuring that these changes have been advised and recorded.

There are also some restrictions on the contracts that directors might have with the company and these include the following:

  • Substantial property transactions between a director and the company
  • Entering into service agreements exceeding five years with companies without the approval of shareholders (unless they can be terminated by the company on notice).
  • Very strict rules on loans and similar transactions with directors (although it is possible for the company to provide loans under £5000 or which allow a director to perform their duties).

This article is not intended to be a fully comprehensive guide to the duties of directors but should be viewed as a useful framework to work within. For specific queries relating to the role of directors, professional advice should be sought.

Legal Advice, Starting Out, Business Tax