Becoming a company director brings authority and influence, but it also carries significant legal responsibilities. In England and Wales, directors are subject to statutory duties under the Companies Act 2006 and may face personal liability if those duties are breached. Understanding these obligations is essential for protecting both the business and the individual.
Statutory Duties of Directors
The Companies Act 2006 sets out seven general duties owed by directors to the company. These duties apply regardless of company size and include:
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Duty to act within powers
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Duty to promote the success of the company
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Duty to exercise independent judgment
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Duty to exercise reasonable care, skill and diligence
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Duty to avoid conflicts of interest
Directors must act in good faith and in the best interests of the company as a whole. This often involves balancing shareholder interests with long term sustainability and creditor considerations.
The duty to exercise reasonable care includes an objective and subjective test. Directors are expected to meet the standard of a reasonably diligent person with their knowledge and experience.
Personal Liability Risks
Although a company is a separate legal entity, directors can face personal liability in certain circumstances. Common risk areas include wrongful trading, fraudulent trading, breach of fiduciary duties, and personal guarantees.
Wrongful trading arises where directors continue trading when they knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation. In such cases, the court can order directors to contribute personally to company losses.
Directors may also face disqualification under the Company Directors Disqualification Act 1986 if their conduct renders them unfit to manage a company.
Duties During Financial Difficulty
When a company approaches insolvency, directors must prioritise creditor interests. Continuing to incur credit without realistic prospects of repayment may expose directors to claims. Keeping accurate financial records and seeking professional advice early can significantly reduce risk.
Resignation does not automatically remove liability for past conduct. Decisions taken before insolvency may be scrutinised by liquidators.
Protecting Yourself as a Director
Risk management is essential. Directors should ensure:
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Board decisions are properly recorded
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Conflicts of interest are declared
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Professional advice is sought when needed
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Financial information is regularly reviewed
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Personal guarantees are carefully considered
Understanding legal responsibilities strengthens decision making and reduces exposure.
If you are a company director concerned about your duties or facing potential liability, Penerley can provide clear and strategic advice. Contact our commercial law team today to protect your position and ensure compliance with your statutory obligations.
