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A conversation about the responsibilities of a company director

As well as keeping records and making annual filings, all company directors owe general duties to their company. These duties regulate how they should carry out their role on a day-to-day basis.

Here, Gary Townley from Companies House and Harry Birmingham from Sparqa Legal discuss some of the directors’ duties.

Gary: We’re currently in our peak accounts filling period and we’ve issued a lot of information about filling accounts, such as encouraging everyone to file online as it’s quicker and cheaper. But as well as annual filings, there are other responsibilities that come with being a company director. Can you explain what these are?

Harry: That’s right, becoming a director is more than just a box-ticking exercise. As well as taking on responsibility for your company’s various filing and record-keeping obligations, by becoming a director you agree to take on a range of further legal duties. The consequences of neglecting these responsibilities can be serious.

The main legal duties of a director are to:

  • promote the success of the company for the benefit of all shareholders
  • exercise reasonable care, skill and diligence
  • exercise independent judgement
  • act within the scope of their powers

Directors also have a duty to make sure their personal interests do not conflict with those of the company. As part of this, directors must:

  • not accept benefits from third parties if this could lead to a conflict of interest
  • declare any personal interest in a transaction or arrangement involving the company

It’s important to understand and put these duties into practice day to day, because directors can potentially face legal threats, claims and even personal liability if they do not.

To show that you’ve properly accounted for your duties in each decision you make as a director, it’s sensible to record in board resolutions that you’ve properly considered your duties before coming to a particular decision. But equally, you must make sure you fully understand the extent of your duties in the first place, so you can be confident that you’re fulfilling them.

Gary: Can we look at these in more detail? How does a director ‘promote the success of the company for the benefit of all the shareholders'?

Harry: In practice, this means that as a director you must make the interests of the company a priority. You must not favour your own personal interests, or the interests of a particular shareholder, or group of shareholders, over others.

When exercising this duty, each director must act honestly and fairly. Some factors to think about are:

  1. The likely consequences of any decision in the long-term.
  2. The interests of your company’s employees, and the need to take care of your company’s business relationship with suppliers, customers and others. For example, a decision to relocate your office to a different town to reduce your spending on rent may equally have a negative impact on other stakeholders. You must consider this.
  3. The impact of your company’s operations on the community and the environment.
  4. The desirability of your company maintaining a reputation for high standards of business conduct. For example, starting a controversial and provoking ambush marketing campaign might gain attention and website hits, but it could also negatively affect your company’s wider reputation and standing.
  5. The need to act fairly between shareholders of your company. For example, you should make sure a decision to enter into a joint venture with a company owned by your majority shareholder will benefit all shareholders.

Of course, these factors may overlap, but it’s a question of weighing them up to come to an appropriate decision.

Gary: Yes, and if you do relocate your registered office, do not forget to inform us at Companies House by updating your company details. On to exercising reasonable care, skill and diligence, what skills and experience are directors expected to have?

Harry: As a director, you must exercise the care, skill and diligence which can reasonably be expected of someone who’s a company director. This is very general, and what it actually means in practice will depend on a range of factors including:

  • your own level of experience
  • your role within the company
  • the specific facts of the situation you find yourself in

As a general rule, you should consider the following factors when judging the level of care, skill and diligence you need:

Your company can expect more from you as a director in an area where you have particular expertise. For example, if you’re also a qualified accountant, you’ll be expected to exercise a higher level of skill and care in relation to financial matters than other directors without the same accounting background.

In certain situations, you should be able to rely on external advisers for advice, such as:

  • lawyers
  • tax advisers
  • accountants

But you'll need to monitor their activities and keep on top of what they’re doing. You risk a breach of your duties if you blindly rely on others without any oversight.

The way you’re involved in the affairs of your company and the board generally is relevant. For example, if you’re a managing director or chief executive you would generally be expected to be more closely involved in the day-to-day affairs of your company than a non-executive director.

Gary: Thanks Harry, we often try to inform directors that although you can employ someone to manage things for you, ultimately the responsibility for the company lies with you as a director. On to independent judgement, how is this exercised?

Harry: That’s quite right, and it’s important for directors to always appreciate that they’re responsible for making sure their company complies with the law.

As a director, you must make sure you’re making your own independent decisions at all times. Even if you’ve been nominated to the board by a specific shareholder, for example, you must not let loyalty to that shareholder affect your judgement.

You must make sure you do not limit your discretion by agreeing to exercise your powers in a certain way, or by simply following the instructions of a third party with no independent consideration of your own.

The main exception to this duty is when you’re acting in a way which is required by your:

  • company’s articles of association
  • shareholders’ agreement
  • other contract

If, for example, your articles require you to declare a fixed dividend to certain shareholders each year, as a director you could not be accused of failing to exercise independent judgement if you approve that dividend.

This duty does not prevent you from relying on the advice or expertise of others, when it’s appropriate. You’re likely to need to get external advice in some cases, to make sure you’re complying with your other duties to your company. But you should be careful not to simply follow advice blindly or hide behind advice to spare yourself of personal responsibility.

Gary: Thanks Harry, the last thing we’re going to discuss today is directors’ powers. Can you explain what they are and how these are applied?

Harry: This depends on the terms of your company’s articles of association. They give powers to directors and also set out the rules which directors must follow when carrying out their day-to-day management duties.

As a director, you should familiarise yourself with the terms of your company’s articles and have them in mind when making decisions. For example, there may be restrictions in your articles on how much your company can borrow or who your company can issue shares to. There’ll also be certain decisions that only company shareholders can make.

You should review your service agreement or letter of appointment and any shareholders' agreement for further provisions which might grant you specific powers - or place restrictions on - what you can do as a director.

For guidance on running a company and your responsibilities as a director, sign up to our upcoming bitesize webinar series.

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  1. Comment by Sophie Johnson posted on

    Brilliant round-up, Thank you. I wonder what each of you will think of my share-of-freehold company that owns its freehold Victorian property of 20 flats and sizeble garden situated on a pretty seafront.

    Ten years ago, the outgoing director imposed a 'manager' on our company. This 'manager' appointed all the four current directors. Neither 'manager' nor ex-director thought of consulting the members.

    None of these directors has managed to read our Lease yet, nor has the 'manager'. None has a sufficient literacy level. Ditto all but a few members,

    'Manager' is the de facto landlord, and the directors obey his every edict, inter alia, that they may not 'talk out' to the members.

    This year, 'manager', apparently with the connivance of all four directors, closed down the company's bank account into which we had, since the beginning of our company's time, paid our annual maintenance fee. Pretending that our company has a new bank account, 'manager' directed our future payments into his private limited company's bank account. So we did not pay our company this year, as our Lease directs us. We paid 'manager'.

    Only two members have objected. But then, there is no place to register objection: All is dominated by 'manager', and he has a mouth like a rapid sewer rat. Very few members have strong enough stomachs for that.

    AHEM ... Is our company still solvent? Is it still a company?

    Mr Townley, are there enough dysfunctional companies like ours to persuade you to bring back Mr Birmingham to let our members benefit from his wisdom? A 'power of company members' discourse would be a treat.

    • Replies to Sophie Johnson>

      Comment by Jodie John - Digital Content Designer posted on

      Hi Sophie, thank you for your comment.

      We’re not able to comment on individual companies on our blog.

      We have guidance for flat management and right to manage (RTM) companies and also an online interactive tool aimed at helping flat management company directors. You may also find these blog posts helpful:

      Becoming a director or member of a residents’ management company
      Freehold management companies: making decisions and managing disputes

      If you still need further advice, please email

      • Replies to Jodie John - Digital Content Designer>

        Comment by Sophie Johnson posted on

        Dear Jodie,

        Thank you for your response.

        I know from experience that Companies House will not intervene in individual company matters, for it has no investigative powers. I know also that no Companies House publication addresses the sort of problem I outlined above, i.e., the problem of company members let down by the directors imposed on them.

        However, I shall take your advice to approach enquiries@companies house. (This will be my approach of the umpteenth time.) My enquiry will simply be 'What can company members do in this (the above-outlined) situation?' I have no doubt that the response will be 'we cannot intervene', and 'consult a solicitor'.

        Such advice, however, is less than realistic: The charges of the few litigating solicitors who work in this area (Companies Act governed private management companies) are very high. And there is very little precedent to go by. I know only of di Marco and Morshead Mansions. I know also that we have no member with the financial resources of Mr di Marco, so no-one equipped to litigate.

        It really is a crying shame that Companies House has not bothered to take any account of the rights on the members (never mind the directors!) of private residential management companies.

        • Replies to Sophie Johnson>

          Comment by Jodie John - Digital Content Designer posted on

          I’m sorry to hear of your situation, Sophie. You are correct, Companies House does not have the power to act as an arbiter in dispute cases.

          If you haven’t already, I’d also recommend contacting Citizen’s Advice for support. I hope you’re able to resolve your issue.

  2. Comment by Sophie Johnson posted on

    Thank you, Jodie.