The role of a company director comes with a number of legal responsibilities, which are set out in the Companies Act 2006 and defined in the company’s articles of association.
Appointed by members (shareholders or guarantors), directors are tasked with managing day-to-day business activities, company finances, and administrative functions on behalf, and for the benefit, of these members.
Whilst the role and responsibilities of company directors are distinct from those of company members, it is commonplace for the same people to be both directors and shareholders. This means that one person can own and manage a company single-handedly, which makes setting up a limited company a popular option for sole traders and self-employed individuals.
General duties of a company director
Under the Companies At 2006 (sections 171-177), a company director has 7 general duties, which are based on certain common law rules and equitable principles. These important statutory duties are:
1. To act within powers
A director must act in accordance with the decision-making powers defined in the company’s articles of association (‘constitution’), which is a governing document that outlines the rules and regulations for running the company.
The powers of a director can vary significantly from business to business, depending on whether the company adopts Model articles of association or altered or bespoke articles.
2. To promote the success of the company
A director must act in good faith and in a manner that he/she considers most likely to promote the company’s success for the benefit of its members as a whole.
In doing so, a director must have regard for the consequences of his/her decisions on other stakeholders, including employees, creditors, suppliers, customers, and communities, as well as consider the impact on the environment, the reputation of the company, and the long-term success of the business.
3. To exercise independent judgment
A company director must exercise independent judgment by developing an informed view on the activities of the business, rather than simply enacting the demands of majority shareholders or other beneficial parties.
4. To exercise reasonable care, skill, and diligence
Company directors must exercise reasonable care, skill, and diligence whilst carrying out all functions of the role.
This means that a director is expected to possess the general knowledge, skill, and experience that could be reasonably expected of a person appointed to carry out the functions of a director in relation to a particular company, rather than being appointed purely on the merit of name or reputation.
5. To avoid conflicts of interest
Company directors must avoid or manage all situations in which they have, or may have, conflicts of interest that could affect their objectivity and loyalty to the company. Examples of such conflicts of interest include:
- Holding an advisory position (e.g., consultant or accountant) in a firm that is a competitor of the company
- Acting as a director and/or holding majority shares in a company that is, or could be, affected by the activities of the company (e.g., a supplier, client, or competitor of the company)
- Other business or personal relationships with individuals or other entities that are, or could be, affected by the activities of the company
- Taking advantage, for their own personal gain, of property, information, or opportunities belonging to the company, even if the company does not take advantage of these opportunities
6. Not to accept benefits from third parties
A director must not accept any benefits from third parties that are given because he/she is a director, or as a result of doing (or refraining from doing) anything as a director. In this context, the Companies Act 2006 defines ‘third parties’ as:
“a person other than the company, an associated body corporate, or a person acting on behalf of the company or an associated body corporate.”
7. To declare interest in proposed transaction or arrangement
If a director is directly or indirectly interested in any proposed transactions or arrangements with the company, he/she must declare the nature and extent of such interest to the other company directors.
Additional duties and responsibilities of a company director
In addition to the general statutory duties outlined above, the Companies Act 2006 and other sources of legislation (e.g., employment, health, and safety, licensing, data protection, environmental), as well as any service contract that may exist, impose a number of important obligations on a company director.
These additional duties, many of which are administrative in nature, arise from a director’s responsibility to ensure that the company itself adheres to its statutory obligations. They include:
1. Registering for business tax
Within three months of starting to trade, a limited company must register with HMRC for Corporation Tax. This can be done online. It may also be necessary to register the company for other business taxes and HMRC services, such as VAT, PAYE, and the Construction Industry Scheme (CIS).
If your company has employees, you may have to operate PAYE (‘Pay As You Earn’) to deduct Income Tax and National Insurance contributions from employees’ wages.
At Quality Company Formations, we offer a PAYE Registration Service for £19.99 + VAT as an optional add-on with all of our company formation packages.
If your VAT-taxable turnover exceeds £85,000 (2023/24 VAT registration threshold) in a rolling 12-month period, or you want to register voluntarily, Quality Company Formations includes a VAT Registration Service with our Fully Inclusive Package.
2. Filing an annual Confirmation Statement
At least once every 12 months, company directors are responsible for filing a confirmation statement with Companies House. This document, which was previously known as an ‘annual return’, is used to confirm that the information held at Companies House is correct and up to date.
Directors must check and confirm the details of:
- shareholders or guarantors
- the company secretary (if one is appointed)
- people with significant control (PSCs)
- the registered office
- the SAIL address (if one is used)
- the location of statutory records
- SIC code(s)
- company shares
To help you stay on top of your important directorship duties, Quality Company Formations provides a Confirmation Statement Service for £44.99 + VAT.
3. Filing annual accounts with Companies House
To report a company’s trading status and financial activity, directors must file annual accounts at Companies House.
The first accounts should be delivered 21 months after the date of company formation. Subsequent annual accounts must be filed with Companies House 9 months after the end of the company’s financial year.
Dormant companies (i.e., those that are not trading) have to file dormant accounts with Companies House. To ease the administrative burden placed upon directors, Quality Company Formation offers a Dormant Company Accounts Service to all UK limited companies for only £49.99 + VAT
4. Filing Company Tax Returns and annual accounts with HMRC
Annual accounts must also be delivered to HMRC as part of the Company Tax Return, which is used to work out and report how much Corporation Tax (if any) the company owes. The filing deadline is 12 months after the end of the company’s ‘accounting period’ for Corporation Tax.
Directors must ensure the any Corporation Tax owed by the company is paid no later than 9 months and 1 day after the end of the Corporation Tax accounting period.
Please be aware that the deadline for paying Corporation Tax is before the deadline for delivering the Company Tax Return and accounts to HMRC. Many new directors get caught out by this.
Regardless of whether an accountant is appointed to take care of your company’s bookkeeping, accounting, and tax return requirements, the director is ultimately responsible for ensuring that all filings and payments are accurate and made on time.
5. Reporting company changes
Company directors are responsible for reporting certain changes to Companies House, including:
- Change of registered office address
- Use of SAIL address
- Appointment or removal of a director
- Change of director’s details
- Appointment or removal of company secretary
- Change of secretary’s details
- Change of shareholder or guarantor details
- Issue of new shares
- Change of location of statutory records
- Change of company name
- Change of articles of association
- Registration of charges
- Change of PSC details
Directors should also tell HMRC if the company’s contact details change or when an accountant or tax advisor is appointed.
Maintaining company stationery
It is the responsibility of a director to make sure that the full company name is included on all forms of official company stationery, including documents, letters, invoices, emails, publications, marketing material, and websites. Directors should also ensure that business letters, order forms, and websites show the following details:
- Company Registration Number (CRN)
- Registered office address
- UK jurisdiction where the company is registered
- The business is a limited company
Keeping company records
Directors must keep accurate and up-to-date records about the company and its financial activities. These important records, which are usually stored at a company’s registered office address, include:
- Statutory registers of directors, shareholders, company secretaries, and PSCs
- Accounting and financial records
- Resolutions and minutes of meetings
- Stock Transfer Forms and share certificates
- Charges secured against the company’s assets
All such records should be kept in hard copy and/or digital format for a minimum of 6 years, but it’s good practice to keep them for 10 years.
Registering for Self Assessment
If a company director is also a shareholder, he/she must register for Self Assessment to report any dividend income (from shares) received in addition to his/her director’s salary.
Personal liability of company directors
Directors can be fined, prosecuted, and/or disqualified should they fail to meet their duties and responsibilities. Companies can also face serious consequences – including late filing penalties, prosecution, and being struck off the register – if their appointed directors do not maintain all corporate obligations and responsibilities.
Undertaking their duties as agents of the company, directors are usually not personally liable for company debts, unless they also hold shares in the company. This is because limited companies exist as separate legal entities. That being said, a director may be personally liable for company debts in certain circumstances, such as:
- Providing a personal guarantee in support of a company loan or lease
- Engaging in wrongful trading when the company is insolvent (e.g., continuing to trade at a loss)
- Engaging in fraudulent trading, which includes:
- Attempting to raise funds via fraudulent means
- Incurring debt or obtaining finance whilst knowing that it cannot be repaid
- Misfeasance (benefiting from a company transaction at the expense of creditors), which includes:
- Disposing of company assets below true market value or for free
- Removing or concealing company assets
- Paying shareholder dividends when the company is in financial difficulty
- Making unauthorised directors’ loans or taking a high salary when the company is unable to support such applications of funds
- Making preferential payments to certain lenders
- Failing to take every reasonable step to prevent unpaid debts
- An overdrawn director’s loan account
- Wilfully failing to deduct PAYE and National Insurance Contributions
- Failing to regard statutory minimum wage requirements
- Making unlawful deductions from employees’ wages
A company director can also be held personally liable for acts or omissions committed during the course of their appointment, including unlawful discrimination; endangering workers’ pensions through chronic mismanagement; health and safety offences; environmental breaches; corporate manslaughter; and wilfully ignoring the involvement of others in fraud, bribery, or money laundering offences.
In exceptional circumstances, directors can be disqualified (banned) from acting as a company director for up to 15 years. They can also be sent to prison for serious offences.
Whilst all of this may sound a tad terrifying, directors can easily protect themselves against personal liability by acting in good faith, adhering to their statutory duties and responsibilities, and purchasing appropriate insurance policies such as Directors’ and officers’ Liability insurance and/or Professional Indemnity insurance.