“Director” is a broad term in business and there are many subtle differences between different types of Director.

The fundamental definition that is important from a legal perspective is that a Director is any person with responsibility for the direction of a company’s business. This position can be formally appointed and such appointments are registered with Companies House.

These registrations must be kept up to date with details of any changes, including appointments, resignations and changes of particulars. Those who are not registered but still act in the capacity of a Director are termed Shadow Directors. There is also a distinction between Directors who are employed by the company (Executive Directors) and those who are not (Non-Executive Directors).

These variations have no effect on the legislative obligations of a Director and therefore any individual acting in such capacity must be aware of their duties.

Core Duties of Directors

The Companies Act 2006 formally outlines the legal obligations of any Director, determining the manner in which they apply their influence over a company. In summary this set of legal guidelines instructs Directors to act in the best interests of the company and shareholders and to behave in a manner which is honest, considerate and reliable. There are 7 specific duties laid out in this legislation:

1. To act in accordance with the company’s constitution and only exercise powers for the purpose for which they were conferred.
2. To act in a way which they consider is most likely to promote the success of the company for the benefit of its shareholders as a whole. Here Directors must show that they have considered long-term and wider factors that are employees, customers, suppliers and the impact of the company’s operations on the community and the environment, the company’s reputation for high standards of business conduct and the need for fairness between shareholders. This has been termed “enlightened shareholder value”, and it has been argued that the requirement to consider these factors will make decision-making more burdensome.
3. To exercise independent judgment.
4. To exercise reasonable care, skill and diligence.
5. To avoid conflicts of interest.
6. Not to accept benefits from third parties.
7. To declare any interest in a proposed or existing transaction with the company.

In addition to these considerations, Directors must also declare any interests of their own and of their family members which could directly or indirectly intersect with company activities.

Additional Duties of Directors

Further to the statutory responsibilities, Directors also have obligations to act correctly in scenarios where there are risks of their companies failing to meet typical commercial agreements. This can be as broad ranging as taking deposits for work that cannot be delivered, allowing continued trade when the company is insolvent or paying certain creditors before others. Specific fraud and wrongful trading legislation exist to prevent these activities and punishment can include jail and fines of unlimited value if an individual is found guilty of failing to meet their responsibilities.

Seek Expert Advice

The detailed regulations that apply to those that hold a position as a Director and potential weight they can hold after a decision has been made means that professional legal advice is usually very useful indeed. The implications of any activity you plan to undertake may not always be perfectly clear; at this stage Franklins are always able to offer expert counsel.

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