Director Duties

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These duties ensure that Directors act properly and professionally. These regulations are set out under common law, in legislation and in corporate governance codes. 

It is important to know and understand what your fiduciary duties are as a Director and how to act appropriately so that you don’t breach any of them and face consequences. 

 

What is a fiduciary duty?

Fiduciary duties cover the duty of trust and confidence between yourself, the company, its stakeholders and members. They come from common law duties and also statutory duties laid down in the Companies Act 2006.

A concept introduced, named the “Enlightened Shareholder Value”, clarifies the wide-ranging duties of a director. This helps to ensure that employees and shareholders receive consideration during a directors decision-holding process. 

As an acting director of a company, you will have various fiduciary duties, including:

• A duty to promote the success of the company for the benefit of its members as a whole;
• A duty to exercise independent judgement;
• A duty to avoid conflict of interest;
• A duty not to accept benefits from third parties;
• A duty to declare an interest in proposed transactions or arrangements.

 

Are there any additional duties and responsibilities of a director?

In addition to the general statutory duties, there are a number of other duties in which directors are obligated to.

These can include:

• Registering for tax within the first three months of starting trade;
• Filing annual confirmation statements with Companies House to confirm all information is up to date;
• Filing Company Tax returns and annual accounts with HMRC;
• Reporting company charges.

 

What are the consequences of failing to follow director duties?

If loss or damage has been suffered by a shareholder, creditor, or company, they can take action against you, the acting director, personally. It’s often the case that the company as an entity pursues directors who have failed in their fiduciary duties.

 

Removal from position:

In some cases, the director may be removed from the office if more than half of the shareholders vote in favour. The director must be allowed to offer their own representations during the meeting. 

The company’s constitution determines how this process is carried out, but removal of the director may only be temporary, pending further investigation. 

 

Injunctions:

Interim injunctions can be issued by the court with the intention of halting any ongoing actions in breach of director duties. It serves to reduce the potential for further financial loss and prevent irreversible damage to the company. 

This could be caused by the director attempting to harm the reputation of the business or even bring down its value. 

 

Fines:

Failure to disclose an interest in an existing transaction or arrangement with the company also carries a risk of a criminal fine.

Is there any form of relief for a breach of general director duties?

If a director finds that they have acted in a way which breaches the general duties owed to the company, there are a few different methods of relief:

• The breach may be ratified by resolution of the company’s shareholders;
• The court may grant relief if the director acted honestly and reasonably;
• The company may have arranged insurance for the benefit of its directors; 
• The company may offer to assist the director by indemnifying them against costs incurred in successfully defending a claim for breach of duties owed to the company. 

 

Do directors have a fiduciary duty to shareholders?

Yes, directors do have a fiduciary duty to shareholders. 

Directors should ensure that the information they provide to shareholders is clear, comprehensive and not misleading or hiding any particular materials. 

There must be a “special relationship” between the director and the shareholder in which the director does not know more than the shareholders.

 

What issues can Directors face during Insolvency?

If a company is facing financial issues, directors should seek independent advice as soon as possible if they are to avoid potential personal liability under insolvency legislation. 

The potential risks for a director in this area are complex and include the risk of being disqualified from holding the position of director or being involved in the promotion or management of a company for up to 15 years. 

Some of the key issues for a director of a company which is insolvent are:

• Wrongful trading, also known as unlawful trading:
  If you form the opinion that your company is at risk of insolvency, it is vital that you obtain immediate advice. There are a number of risks to trading whilst insolvent.

If it is considered that you knew, or ought to have known, that there was no reasonable prospect of your company avoiding insolvency, then you may be held personally liable for any loss suffered by the company or creditors as a result of you failing to act appropriately in your financial dealings. 

 

• Misfeasance:

Often, these sorts of actions will occur in cases where the director has failed to act in good faith.

Examples of such instances would be where a director has disposed of assets at an undervalued level, or has sought to prefer a particular creditor(s) over another. 

Whilst these are worst-case scenario examples, it is key that you understand your responsibilities as a director. Worse case offences can result in personal liability, or in the most severe cases, a fine or imprisonment. 

 

Can a company indemnify or insure the director against claims?

A company can, but is not obligated to, indemnify you as a director in respect of certain proceedings brought against you by third parties. An indemnity can potentially cover the cost of the claim itself, and the costs involved in defending. 

However, this can never cover unsuccessful defence, fines imposed in criminal proceedings or penalties imposed by regulating bodies. 

 

Advice on Director and Company Finances

If you need professional guidance on your fiduciary duties as a director, or if you are unsure if a conflict of interest has arisen, contact The Insolvency Experts today to find out how we can help. 

If your company is struggling financially, we will seek to quickly obtain an understanding of your business and its issues in order to advise on the most appropriate course of action.

Taking such advice will not only help you with dealing with your company’s affairs in the correct manner, but also mitigate any risk to you as directors, for failing to act responsibly. 

You can get in touch by calling 0300 303 8284 or by filling out our contact form.