What are a director’s legal obligations?

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The Companies Act 2006 details the role and responsibilities of a company director and sets forth their legal obligations. Recent developments outline the potential consequences for breaching a director’s duties and should be carefully digested by anyone occupying such a position.

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It is recommended that anybody in a position of authority within either a public or private enterprise familiarises themselves with the most recent guidance and cascades key points as required through their executive board.

Duties of a director

A company director is responsible for safeguarding the success of their business and its shareholders, and they do this by acting within their delegated authority, promoting the success of the business, exercising reasonable care in their decision-making, avoiding conflicts of interest and applying their individual judgement.

A company director has to declare any interests in proposed arrangements between their company and another, especially where they or somebody close to them may benefit from the arrangement. A company director may also be a shareholder for another organisation provided that this is declared and recorded upon their appointment and taken into consideration during any contractual arrangements with such company.

Recently, the scope of a director’s duties have been modernised to include a refreshed interest in their accountability to staff, customers, contractors and the environment, which includes new guidelines on diversity in the workplace, health and safety, pay and benefits, climate-related financial disclosures, sustainability and the composition of the executive board. These changes aim to ensure that directors focus not only on the financial performance of the organisation but on the implications of decisions that they make on all interested parties, the long-term viability of the company and the company’s reputation.

Consequences for breaching duties

There are many financial, legal and moral consequences faced by a director for failure to carry out their duties in an appropriate fashion or for acting beyond their delegated authority. Should the company board decide that the behaviour, actions or inactions of the director have caused harm to the company, they can pursue legal or civil penalties against the director, removing them from the post and potentially disqualifying them from acting in a director’s position elsewhere for up to 15 years.

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Generally, being the director of a Limited company does not impact personal finances, even if the company were to go into administration. That is, unless the director has signed a director guarantee which makes them personally liable for the company’s debts. Some lenders or trading partners will not do business unless such a document is signed, so it is recommended that legal advice is sought on any occasion in which a director guarantee is required prior to commencing a contractual arrangement.

How directors can protect themselves

Upon appointment to a director’s position, their role, responsibilities and duties must be clearly articulated and understood. They should appoint an appropriate board to support them in carrying out their duties and familiarise themselves with all applicable legislation, taking expert advice where necessary to ensure that no discrepancies or misunderstandings exist.

Whilst carrying out their duties, they must document all decision-making processes, in particular noting the evidence, advice and due diligence used to support their decisions. Being able to robustly defend their decisions will stand them in good stead should they later prove to have been ill-advised or harmful to the business.

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