ICAEW’s guide to the duties and responsibilities of directors
Read ICAEW's guide on the duties and responsibilities of directors, including on internal governance, transactions between a company and its directors or shareholders, and corporate administration. Directors can also be responsible for breach.
ICAEW’s guide outlines the essentials that all directors of private companies limited by shares should know including:
You will normally know if you are a director as you will have formally accepted the position. However, if you exercise sufficient influence over a company or act as if you are a director, you may be treated as a director for certain purposes even if not formally appointed.
Should you be a director?
Certain people are prohibited from acting as a director, including persons under 16 years of age, bankrupts, disqualified persons and a person acting as auditor of the company. (regulation 9). While there is no mandatory qualification required to be a director, a director is required to perform the duties outlined below and so must be capable of doing so.
The Companies Act 2006 sets out the seven general statutory duties of a director. These are listed below, but you can read additional commentary in the full guide.
- To act within powers (regulation 16). This requires a director to comply with the company’s constitution and decisions made under the constitution and to exercise the powers only for the reasons for which they were given.
- To promote the success of the company for the benefit of its members (shareholders) as a whole. This duty is often referred to as the "s172" duty.
- To exercise independent judgment, that is, not to subordinate the director’s power to the will of others. This does not prevent directors from relying on advice, so long as they exercise their own judgement on whether or not to follow it.
- To exercise reasonable care, skill and diligence (regulation 25). This requires a director to be diligent, careful and well informed about the company's affairs. If a director has particular knowledge, skill or experience relevant to his function (for instance, is a qualified accountant and acting as a finance director), expectations regarding what is ‘reasonable’ will be judged accordingly (regulation 25).
- To avoid conflicts (or possible conflicts) between the interests of the director and those of the company (regulation 30-36). The prohibition will not apply if the company consents (and consent meets the necessary formal requirements).
- Not to accept benefits from third parties (ie a person other than the company) by reason of being a director or doing anything as director (regulation 31). The company may authorise acceptance (subject to its constitution), for instance to enable a director to benefit from reasonable corporate hospitality; and
- To declare any interest in a proposed transaction or arrangement (regulation 32-36). The declaration must be made before the transaction is entered into and the prohibition applies to indirect interests as well as direct interests.
The general duties outlined above are owed by the director to the company and only the company (or in limited circumstances, the shareholders) will be able to enforce them as such. The general duties outlined above are owed by the director to the company and only the company (or in limited circumstances, the shareholders) will be able to enforce them as such. Directors are subject to a variety of sanctions for breach of their duties. The guide covers personal liability, fines and criminal offence and disqualification (or undertakings in lieu).
Directors have specific responsibilities in relation to operation of the company, including preparing annual reports and accounts.
Directors are responsible for keeping “adequate accounting records” (CA2006 s386-389). This means records that are sufficient (a) to show and explain the company’s transactions; (b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time; and (c) to enable the directors to ensure that the company’s annual accounts comply with relevant accounting requirements.
Directors of every company must prepare annual accounts that give a true and fair view of the assets, liabilities, financial position and profit or loss of the company (CA2006 s393-419A). The accounts of private limited companies may be prepared under UK GAAP or EU-adopted IFRS.
A company is required to send copies of its annual accounts and reports (or in some cases, just its strategic report) to its shareholders and certain other persons (CA2006 s423-436).
When a company’s financial position has deteriorated to the point where its solvency is doubtful, the directors should take account of the interests of creditors. The greater the risk of insolvency in terms of probability and extent, the more directors should take into account creditors’ needs and the less those of shareholders. Where there is no reasonable prospect of avoiding insolvent liquidation/administration, the interests of creditors become overriding. Directors must consider the interests of creditors as a whole, and not only the interests of a particular creditor or class of creditor.
Can a director be relieved of liability?
If a company goes into insolvent liquidation or administration, a director can be personally liable for wrongful trading under IA1986 s214. This liability arises if the director concludes or should have concluded that there is no reasonable prospect of avoiding insolvent liquidation or administration (under a balance sheet test) and does not take every step that the director ought to take to minimise potential loss to creditors.
To avoid (or minimise) liability for wrongful trading, directors may have to cease trading. Resignation may be considered as an abrogation of responsibility and not serve to protect a director from liability. A director who resigns from office may still be liable for any wrongful trading that took place during the director’s time in office.
The limited liability afforded by a limited liability company applies to its shareholders rather than its directors. Directors may be personally liable where they fail to meet their responsibilities.
Fines and criminal offence
Breach of company law may be a criminal offence. For instance, breach of the CA2006 requirements on corporate administration (eg, keeping company registers and making filings) may constitute an offence for which the company and every officer in default may be liable.
Disqualification (or undertakings in lieu)
A court may disqualify a person from being a director of a company or in any way concerned in the promotion, formation or management of a company under CDDA1986. Undertakings not to act as a director may be accepted in lieu.
Directors are responsible for the internal governance (or organisation) of the company. Directors’ powers are given to them collectively as a board and must generally, subject to any proper delegation, be exercised by the board, as a whole. Directors therefore have a collective responsibility to manage the company.
Delegation of tasks
The constitution may authorise directors to delegate the exercise of their powers to a committee consisting of one or more directors, or to a managing director, or other executive director. However, this does not absolve directors of all their responsibility for the management of the company.
Other section of ICAEW's guide to duties and responsibilities of directors
The guide also gives an overview of specific requirements applying to transactions between the company and its directors and transactions with shareholders. It also serves as a reminder that directors are ultimately responsible for the management of a company and so are responsible for ensuring that the company complies with all laws that apply to it.
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