General duties of directors

The Companies Act 2006 sets out directors' duties in 7 general categories (see sections 170 to 177 of the Act for more information). Both executive and non-executive directors must carry out these duties.

If you're a director of a company, you have the following duties to it:

1. Duty to act within your powers

You must act according to the company's constitution and must only exercise powers for their proper purpose.

The company's constitution is its articles of association, which are a set of rules governing how the company is run (see 'Forming a company' under How to form a company). It also includes any resolutions taken by the shareholders and any shareholders' agreement.

2. Duty to promote the success of the company

You must do what you honestly think is likely to promote the success of the company for the benefit of the members.

You must act in good faith and consider factors such as:

• The interests of the company's employees
• The likely long-term consequences of any decision
• The company's business relationships with suppliers and customers
• The need to act fairly as between shareholders ('members') of the company
• The impact of the company's operations on the community and environment
• The desirability to maintain a reputation for high standards of business conduct

(This isn't an exhaustive list.)

In an insolvency situation, you must act in the interests of the creditors and not do anything that would worsen the creditors' position.

It's not clear how directors should balance conflicting factors. For example, deciding not to close a factory might be in the community's interests, but not in the shareholders' interests. It's therefore important to take detailed minutes to show that directors have considered these factors.

3. Duty to exercise independent judgement

You must exercise independent judgement when taking part in the running and decision making of the company, rather than just leaving decisions up to the other directors, blindly going along with whatever they say or delegating your voting at board meetings. This duty applies particularly to non-executive directors who must avoid being 'sleeping directors', i.e. directors who play no active role in the management and leave decisions to others.

If you go along with the decision of others, this doesn't necessarily mean that you're not exercising independent judgement. You may well have decided to do so after careful consideration. This duty isn't breached if you act according to an agreement that was duly entered into by the company.

4. Duty to exercise reasonable care, skill and diligence

You must act with the care, skill and diligence expected of a reasonably diligent person. This standard is assessed by considering:

• the general knowledge, skill and experience reasonably expected of a director with your functions; and
• the general knowledge, skill and diligence which you in fact have.

Therefore, if you have a specialist role, such as a finance director, or specialist experience, knowledge and skill, you'll have a higher threshold in carrying out this duty.

5. Duty to avoid conflicts of interest

You must avoid having a direct or an indirect interest that conflicts with the interests of the company.

You must also avoid making a personal profit at the expense of the company, e.g. by using the company's property or information to make a profit. You shouldn't take advantage of business opportunities you've discovered in your capacity as a director by entering into contracts personally, rather than in the name of the company, in order to make a personal profit. This duty will continue after you're no longer a director. This means that you wouldn't be able to use information and opportunities you became aware as a director in order to make a personal profit after you've left the company. If you do make a personal profit by breaching this duty, the company will be entitled to this profit.

These dealings can be authorised by the non-conflicted directors on the board, as long as certain requirements are met. You should declare your interest and not count in the vote or quorum. This is particularly important if you're a non-executive director holding multiple directorships, as you're then more likely to encounter conflicts of interests.

6. Duty not to accept benefits from third parties

You can't accept a benefit from a third party for being a director or for doing or not doing anything as a director. Benefits can include, for example, non-executive directorship or corporate entertainment. A company could include in its articles a term stating that accepting gifts or corporate entertainment below a certain sum won't breach this duty.

If you accept a benefit as a director, you could also be guilty of bribery.

7. Duty to declare interest in proposed transaction or arrangement with the company

You're required to tell the company's board when you have an interest in a transaction that your company proposes to enter into. For example, if your company wants to take over another company of which you're a shareholder or director, you need to tell the board about your interest in that other company.

You must declare the nature and the extent of your interest to the other directors before the transaction. You can do so at a board meeting or by written notice to all the directors. You must also disclose any interest of a person connected with you, e.g. your spouse and children. Having declared your interest, you generally won't be entitled to count in the quorum for or vote on the decision to enter into the transaction.

However, there are some exceptions to this requirement to declare your interest. It won't be necessary if:

• you weren't aware of the interest or the proposed transaction;
• on a reasonable view the interest is unlikely to create a conflict of interest; or
• the other directors are already aware (or 'ought reasonably to be aware') of your interest.

Also, it won't be necessary for you to declare your interest before the board discusses and votes on the terms of your own service contract, as this would be obvious.

Liability of directors

Since a company is a separate legal person from its shareholders and directors, the directors aren't normally responsible for the company's debts. However, there are some exceptions where the directors will be personally responsible (liable) for the company's debts.

Personal guarantees

Financial institutions often want directors to personally guarantee any loans granted to the company. This means that if a company can't repay the loan or other debt, the director will have to pay it from their personal assets. Giving a guarantee effectively removes the advantage for the directors of limited liability of a company. If a limited guarantee is given, the director's maximum liability will be the amount stated in the guarantee, plus interest.

Disqualification

The court has the power to disqualify a person from being a director of any company for up to 15 years.

A person who gets involved in managing a company while they're disqualified will be personally responsible for debts the company incurs during that time. They'll also be liable to a fine or imprisonment.

Insolvency

Wrongful trading

If the company goes into liquidation and its assets aren't enough to pay its debts, it's said to be in insolvent liquidation. The liquidator of a company in this position can start court proceedings against the company's directors. The liquidator can request a court order requiring the directors to contribute to the company's assets from their personal funds.

Directors will be liable if at some time before the liquidation starts, they knew (or ought to have known) that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Courts won't make an order against directors if it was clear that the directors took every step they should have taken to try to minimise the potential loss to the company's creditors. Only directors can be guilty of wrongful trading.

Fraudulent trading

During the winding-up process, if it appears that the company has committed fraud, including defrauding the company's creditors, the court can order those knowingly involved to contribute to the company's assets. The directors and any other people involved in the fraudulent activity can be found liable for fraudulent trading if they've acted dishonestly.

Misfeasance

During the liquidation process, the court might examine the directors' conduct to see if they have misapplied, retained, or become accountable for any money or other property of the company. If so, the court can make the directors repay, restore or account to the company for the money or property, with interest.

The court might also examine whether the directors have been guilty of any wrongdoing (called 'misfeasance') or have breached any duty to the company. If so, the court can make the directors contribute a sum to the company's assets to compensate for their guilty act.

Re-using name of liquidated company

The director of a company that has gone into insolvent liquidation can't continue business by starting up another company with the same or a similar name. The director can only do so with permission of the court. This rule applies to a person who was a director of the company during the 12 months before it went into insolvent liquidation. This person can't be a director of, manage, or get involved in another company with the same or a similar name for the next 5 years.

If the director does so, they'll be personally responsible for all the debts the new company incurs while they're involved with it. They're also liable to a fine and/or imprisonment.

Responsibility for filing company information

Directors have a responsibility to prepare and deliver the company's documents to Companies House. In particular, these include:

• The confirmation statement (CS01)
• The annual accounts and reports
• Resolutions of the company, particularly special resolutions and those affecting the articles
• Notice of any change in the company's directors, secretary or Persons with Significant Control (PSCs) or in their personal details
• Notice of a change to the company's registered office
• Return of allotment of shares
• Particulars of charges and mortgages

If the directors or secretary don't submit this company information on time, this will be a criminal offence, and the directors and secretary can be prosecuted and fined.

Annual accounts

All private limited and public companies must file their accounts at Companies House.

Generally, the accounts of a company will be made up for a 12-month period – the company's financial year. The financial period ends on the accounting reference date. When you start a new company, its first accounting reference date will be the last day of the month of the first anniversary of your company's registration ('incorporation'). So if you form your company on 18 March 2021, the first accounting reference date will be 31 March 2022 and on 31 March for each subsequent year.

You can change the accounting reference date, but you must tell Companies House using Form AA01. You can't extend the accounting reference period to more than 18 months.

In your company's first year, if the accounts cover a period of longer than 12 months, the directors of a private company must deliver them to Companies House within the later of either:

• 21 months of the date of incorporation; or
• 3 months from the accounting reference date.

If the accounts for the first year cover 12 months or less, the normal filing period will apply. The normal period for a private company to deliver its accounts to Companies House is within 9 months from the accounting reference date. This period will apply every year after the first year.

Note that in calculating dates for filing documents at Companies House, a period of months from a particular date ends with the corresponding date in the month and not the last day in that month. So, if the accounting reference date is 15 April, the company must file accounts by midnight on 15 January the following year, and not 31 January.

All the directors will be guilty of a criminal offence if they don't deliver the accounts on time. If found guilty, a director could end up with a criminal record and a fine.

Confirmation statement

The confirmation statement has replaced the annual returns that companies had to file before 30 June 2016. The confirmation statement confirms that the information held by Companies House about the company is still correct at the date of the statement. If any information has changed, the changes must be stated on the confirmation statement. The confirmation statement must be filed every 12 months. Each 12-month period is called a 'review period'. The first confirmation statement for a new company must be filed within 12 months from the date of incorporation. Other companies must file the confirmation statement within 12 months of the date of the last confirmation statement or annual return. It can be filed earlier than 12 months, but the next confirmation statement will then be due within 12 months of the prior one's date of filing.

The company must sign the first part of the confirmation statement to confirm that all the relevant information has been delivered to Companies House, or is being delivered in the additional parts of the confirmation statement. The additional parts only need to be submitted if there are any changes to report. If the company has elected to keep its register of members, secretaries, directors and directors' addresses centrally at Companies House instead of keeping its own Register at Companies House, it should have updated the central register as soon as changes were made to these. The confirmation statement would then say that the company has carried out its duties to notify Companies House.

The confirmation statement must state the company's name, number and confirmation date. It can be made online via the Companies House WebFiling system or other software filing system, or on paper using form CS01. You will need to check the information held about the company at Companies House. This can be done online via the Companies House Service (CHS), Companies House Direct (CHD) or WebCHeck. You will then state any changes to that information in the confirmation statement.

The following must be included in the confirmation statement if they have not already been notified to the Registrar. Changes to the:

• Standard Industrial Classification (SIC) code or principal business activity description of the company
• Company's members and their shareholding
• Secretary, directors or directors' addresses
• Company's registered office
• Company's principal business

In the first confirmation statement made by a company, the details of the persons of significant control must be set out, unless these are kept in the central register at Companies House. In subsequent confirmation statements, only changes to the details of the persons of significant control need to be stated.

At the same time as delivering the confirmation statement to Companies House, the company must also deliver a statement of capital if there have been changes to any of the following:

• Total number of shares of the company
• The total nominal value of those shares
• The total amount (if any) unpaid on those shares
• The trading status of shares

If there are different classes of shares, the statement should set out any changes to the total number and total value of shares of each class and the rights attached to them since the last statement of capital was filed.

Similarly, unless there was no change during the review period, companies whose shares are not traded on a stock exchange should set out the:

• Name of each shareholder
• Number of shares of each class held
• Number of shares of each class transferred
• Dates of registration of those transfers

This will not be required if these details have been kept and updated on the central register at Companies House.

The confirmation statement must be delivered to Companies House 14 days after the end of the review period. This is shorter than the 28 days previously allowed for filing an annual return. Failure to deliver the confirmation statement within this time will result in officers of the company (including the directors, secretaries and shadow directors) committing an offence and being liable to a fine and to a daily default fine as long as the default continues.