All directors have responsibilities under the Companies Act 2006, but many lose sight of what is required when in the midst of running a company.
Even worse, some don’t even realize what is expected of them. Charlotte MillsHe is the Director and Head of the Corporate and Commercial Team at Jackson Lees check.
A company manager has many duties and wears many hats until he finds himself dealing with all kinds of day to day issues. Notwithstanding this, the director must also ensure that the company complies with the law, submit its accounts and annual confirmation statement at Companies House, and also maintain its financial solvency.
Anyone who is attracted to the job title and situation should think twice about taking on this role. Being a manager may seem prestigious, but it is a serious commitment. Not only will failure to act by certain rules harm the company, but it can result in personal liability or even criminal charges, which means you’ll have a lot to lose if you fail to take your duties seriously.
In addition to broader fiduciary duties (such as acting honestly and in good faith) and regulatory responsibilities (such as health, safety and environmental compliance), there are seven main duties a director must comply with under the Companies Act 2006, namely:
Act within the authorities
The director of a limited company must act according to the company’s constitution, but many do not know what it contains, let alone where to find it!
A company’s constitution, or “statutes,” spell out the rules for how the business is to be run and run. It is a legal requirement that all registered companies have.
If you are not familiar with your file, visit the Companies House website as there will be a copy there and it will be easy to access it against your online company file.
Enhance the success of the company
The law states that directors must consider (among other things) the following:
- The potential long-term consequences of any decision.
- interests of company employees.
- The need to strengthen the company’s business relationships with suppliers, customers and others.
- The impact of the company’s operations on society and the environment.
- Desirability of the company maintaining a good reputation for high standards of business conduct.
- The need to act fairly among the members of the company.
Courts do not expect directors to be guarantors of the company’s success. The legal obligation is for directors to act in a way that they consider (not what a court might consider) will enhance the success of the company for the benefit of its members as a whole.
Courts recognize that managers control an entrepreneurial enterprise and that a degree of commercial risk is a necessary part of business success. Moreover, it has long been accepted that board members are not liable for mere errors of judgment.
While a court may relieve directors of liability if they act honestly and reasonably, it will, in its opinion, only do so if they should be justly relieved. Therefore wise managers will take every reasonable step to prevent liability from arising.
Regular meetings and reviews of the board and other management, accompanied by clear minutes, are the best evidence of what steps the board members have taken and why.
exercise independent judgment
A manager must not let his powers as a manager be controlled by others. This does not prevent managers from relying on the advice of others so long as they exercise their own judgment as to whether or not to follow that advice.
Exercise reasonable care and diligence skills
The manager must diligently exercise his duties, and perform his role to a high standard. The manager must perform to the best of his ability and accept the responsibilities and expectations associated with the role.
Avoid conflicts of interest
A director may not, without the consent of the company, place himself in a position where there is a conflict or potential conflict of interest. Directors should always disclose any potential conflicts.
This problem often arises in family-run businesses, and it is important that managers do not lose sight of their obligations. I am aware of the case of three shareholders, an elderly woman who inherited the share of her husband and his two brothers who did not participate in it. The brothers would take the business opportunities they got from that company and pass them on to another competitor they had set up. This is a clear conflict of interest and he is certainly not acting in the best interests of the company they own with their sister-in-law.
This duty shall also not cease upon termination of the Director’s appointment in connection with the exploitation of property, information or opportunity of which they became aware while in office.
Not accepting benefits from third parties
A director must not accept benefits related to his role from persons other than the company (or a person acting on behalf of the company).
For example, if you are about to enter talks to work alongside another company, you should consider not taking any incentives such as gifts or financial payments from the other party.
Again, this applies after the person ceases to be a manager in respect of the things he or she did or omitted to do prior to the end of the management period.
Declaring an interest in a proposed deal or arrangement
Directors must declare to other directors the nature and extent of any interest (direct or indirect) in a proposed transaction or arrangement with the Company, prior to the Company entering into any such transaction or arrangement.
Interest does not necessarily imply a conflict, but flagging it up front allows your fellow managers to make an informed decision and ensures that you comply with your duties.
Becoming a director of the company puts you in charge and while it may seem like a lot to take in, this direction is good, honest business practice and should not be stressful. The law is there to guide you.
Read more:
Are you a decent manager?