What is the difference between a shareholder and a director?
A shareholder of a limited company is an individual or entity that owns shares in it. This allows the shareholder to receive a potential dividend in return for their investment but will have no involvement in the every day decisions made in relation to the running of the company.
The directors of a company have no financial investment in the company and are effectively agents of the company and are responsible for the day to day running and are entrusted to make the necessary decisions to lead the company in the best direction. The directors may report to the shareholders on such decisions and will deal directly with customers, suppliers and employees of the company.
In reality, many companies with the UK often have the same individuals as the directors and shareholders of a company but it is advisable to understand the difference between the two roles so the lines are not blurred in terms of running the company.
How do I identify a director of a company?
Some employees are given titles within a company that contain the word ‘director’. However, this does not necessarily make them a director for the purposes of the Companies Act. Vice versa, it is possible that some actual directors of a company do not use the title ‘director’. The easiest way to identify the directors of a company are to view the officers as stated at Companies House which can confirm the identify of a company’s directors.
What are the Directors Duties?
The duties of a director are set out in the Companies Act 2006 s171-177. These apply to any director of a limited company in the UK. It is irrelevant of the involvement the director has in the day to day running of a company, the duties still apply.
There are seven ‘general duties’ which directors must comply with. They are:
1. Act within powers: meaning you must only act in compliance with the company’s constitutional documents which govern the company and must only exercise such powers for the purpose that they were given. The constitutional documents in the main are the articles of association but consideration must also be given to any shareholders’ agreements and/or joint venture agreements. By way of example, if the constitutional documents do not provide a director with the power to lend money, that is therefore prohibited for the company.
2. Promote the success of the company: which means the director must act in a way that they consider is most beneficial to the company for the benefit of the shareholders. The director should take in to consideration, amongst other things, the consequences of the decision in the long term, the employees of the company, the relationships that the business has with other suppliers, customers and others and the impact the decision will have on the environment and the local community.
3. Exercise independent judgement: this is relatively self-explanatory; a director must exercise their own judgement when making decisions on behalf of the company. This does not prevent a director from taking advice, but the director must then use this advice to make a decision on their own accord.
4. Exercise reasonable skill, care, and diligence: a director is expected to act:
- with the same level of care, skill and diligence that may reasonably be expected of a person carrying out the same role as that of the director; and
- to the highest level of skill and care that the director actually possesses.
This is both a subjective and an objective measure and the skillset of a director may not be enough if it could be reasonably expected of someone in that same role to have a higher set of skills.
5. Avoid conflicts of interest: meaning a director must not put themself in a position where there is, or potentially could be, a conflict. The conflict would be between the duties the director owes to the company against their own or someone else’s interests. If there is an actual or potential interest you should seek to declare that interest to the board and refer to the articles of association of the company to see if any provisions are provided for in relation to conflicts.
6. Not to accept benefits from third parties: a director must not accept a benefit from a third party due to being in the position of director for a company . It could be argued that if a benefit is accepted this will give rise to a potential conflict of interests.
7. Declare interests in proposed or existing transactions or arrangements with the company: a director must declare the nature and details of any interest in a transaction or agreement of the company be it a direct or indirect interest. This interest must be declared prior to a potential transaction taking place.
What happens if a director breaches a duty?
If a director breaches a duty, the company will potentially have different options available to it such as injunctions, damages (financial penalty due form the director) or compensation. There is also the possibility, depending on the severity of the breach, that a criminal penalty can occur against the director or the director may be struck off and prohibited from being a director anymore.
Get in touch
For more detailed advice and guidance on director duties and how they might apply to your business, please contact Matthew Allen on 01562 820181 or by email at matthew.allen@mfgsolicitors.com.
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