But before you pop open your bottle of champagne and rush to say yes, you should familiarise yourself with the duties and responsibilities of being a director.
These duties and responsibilities apply to both public and private companies. They are the same for all directors regardless of your nationality or place of residence, and whether you are an executive or non-executive director.
Directors owe ‘statutory duties’, which are duties that are set out in legislation, and ‘common law’ duties, which derive from legal precedents established by the courts.
These statutory duties are set out in section 171-177 of the Companies Act 2006 and are summarised below:
Act within powers
You must follow the company’s constitution and articles of association. These are the written rules about running the company, which set out the powers granted to directors and the purpose of these powers.
Promote the success of the company
You must act in the company’s best interests to promote its success. With each decision you make as a director, you must consider factors such as:
the long-term success of the company;
- company employees;
- business relationships with others such as suppliers and consumers;
- the impact the business operations have on the environment; and
- acting in a way which benefits the shareholders as a whole.
This duty is not always so clear cut. For example, if you make a decision which turns out to be a poor commercial decision, this does not automatically mean that you are in breach of this duty. If you considered wider factors, with regard to promoting the success of the company, then you are more likely to have complied with this duty.
Be careful. Although this duty is primarily designed to protect the shareholders of the company, if the company is approaching insolvency then this duty is owed to the creditors of the company. A creditor is anyone who is owed money by the company. You should seek appropriate professional advice in this scenario, as you could end up being held personally liable for the debts of the company.
Exercise independent judgement
You must not allow other people to control your powers as a director. You may rely on the advice, work and judgement of others, however you must use your own independent judgement to make final decisions.
Exercise reasonable skill, care and diligence
You must perform to the best of your ability. The standard of this duty may vary between directors; the more qualified or experienced you are, the greater the standard is expected of you. However, if you lack the necessary expertise to make certain decisions, you must seek the involvement of external advisers.
Avoid conflicts of interest
You must avoid situations where your loyalty may be divided. You should tell other directors and shareholders about any potential conflict of interest that you have with the company.
For example, if you become aware of a business opportunity in your capacity as a director, then that opportunity is owed to the company, even if it outside company’s usual type of business. It is important to note that this duty continues even if you are no longer a director of the company. You cannot simply resign as a director and take up this opportunity.
Gifts from third parties
You must not accept benefits that are offered to you because you are a director where it would compromise your independence. For example, you should not make a secret profit from being a director.
However, you may be able to accept benefits such as reasonable corporate hospitality if it is clear that this would not cause a conflict of interest.
Declare interests in a transaction
You must tell other directors and shareholders if you could personally benefit from a transaction with the company. For example, the company may be looking to enter into a contract with a different company, of which you or a family member is a shareholder.
These types of conflicts can be tricky to deal with in practice. However, directors or shareholders may be able to authorise these conflicts if it is in the interests of the company, and the constitution allows it.
In addition, as a director you are legally responsible for making sure that all records, accounts, and registers are kept up to date, and all necessary filings are made at Companies House.
One example of a common law duty is the duty of confidentiality. You must only use or disclose the company’s confidential information for the benefit of the company.
What are the consequences of ignoring these duties?
If you are found to have breached your duties as a director, it is often the company itself which takes action. In some instances, claims against a director may be brought by the shareholders of the company, law enforcement agencies or insolvency practitioners.
The consequences of breach may include:
- Disqualification as a director
- Award of damages or compensation for financial losses
- Transactions being set aside
- Criminal liabilities
If you have any questions about the duties and responsibilities of a being a company director, please get in touch with Philip Lewis-Ogden, the Commercial Director in our York office.