Tahir's Tips: Director's Responsibilities in a Nutshell

A few weeks ago my round of fashion focused legal tips looked at choosing the right business structure for your fashion enterprise – which leads me to my next feature. My clients often ask me whether they should accept a company appointment as a director. This week’s piece discusses what ‘goes with the territory’ if you decide to accept the often weighty appointment of being a director at a company.

As a director you will have decision-making responsibilities for the company as you will represent the company to the outside world and in many cases will be able to enter into contracts on behalf of the company. This may seem like a great thing and while you might love the fancy title of ‘Director’ below your name, remember that with great power comes responsibility.

Every limited company must appoint at least one director. The Companies Act 2006 imposes a range of duties and obligations on directors of limited companies. In general, a company director owes duties to the shareholders of the company, its creditors and employees. It is important to be mindful of these duties as company directors are subject to personal liability for breach of their duties. The Companies Act sets out seven general duties that directors owe to a company and each of these are outlined below:

Duty to promote the success of the company

This is the overarching duty that directors owe to a company. In order to comply with this duty, directors must ensure that they always act in a way in which they consider, in good faith, would be most likely to promote the success of the company for the benefit of the shareholders. The Companies Act lists a number of factors that directors should consider in order to ensure they comply with this duty. These are:

 1. The likely consequences of any decision in the long term. 

2. The interests of the company’s employees.

3. The need to foster the company’s business relationships with suppliers, customers and others.

4. The impact of the company’s operations on the community and the environment.

5. The desirability of the company maintaining a reputation for high standards of business conduct.

6. The need to act fairly between the shareholders of the company.

Duty to act within powers

A director must act in accordance with the company’s constitution and must only exercise his/her powers for their proper purpose. What this means is that directors must act within the powers given to them by the company’s articles of association. Further, if a director has signed a directors service agreement which sets out their specific role and responsibilities they should not act outside of this.

Duty to exercise independent judgment

Directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise. This means that directors should not be swayed by the views of others, be they fellow board members, shareholders or otherwise and that the decisions made by directors must be their own. This does not mean however that directors cannot follow advice, so long as they exercise their own judgment in deciding whether to follow the advice or not.

Duty to exercise reasonable care, skill and judgment

A director must exercise the reasonable care, skill and judgment that would be expected of a typical director entrusted with the same functions, and with the same knowledge of the relevant director. This means that if you have particular specialist knowledge and experience within the fashion industry you will be expected to make decisions that reflect this knowledge and experience. To comply with this duty it is also important that directors keep themselves informed about the company’s affairs and work with co-directors (if there are any) in supervising and controlling them.

Duty to avoid conflicts of interest

A director must not, without the company’s consent, place himself or herself in a position where there is a conflict, or possible conflict, between the duties he or she owes the company and either his or her personal interests or other duties he or she owes to a third party. This applies in particular to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity. For example there would be a conflict if the director of a fashion label entered into agreements on behalf of the company with a young designer who happened to be the director’s daughter. However, not all conflicts are bad and in this example the director's daughter may be an incredibly gifted designer. Therefore a director will not breach this duty where the conflict is authorised by fellow directors who are genuinely independent in the sense they have no direct or indirect interest in the transaction.

Duty to declare interest in proposed transaction or arrangement with the company

If a conflict of interest arises in a proposed transaction or arrangement with the company a director is under duty to declare to the other directors the nature and extent of that interest, whether it be direct or indirect. It is important that the declaration is made before the company enters into the transaction or arrangement to prevent a director breaching this duty. Directors should also make a further declaration if they become aware that their original declaration has become inaccurate or incomplete. No declaration is required where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or where the company has only one director.

Duty not to accept benefits from third parties

A director should not exploit his or her position for personal benefit. In other words directors should not accept any bribe (whether monetary or otherwise) from a third party in consequence of his or her being a director or doing (or refraining from doing) any particular act as a director unless it cannot reasonably be regarded as likely to give rise to a conflict of interest.

Before accepting the appointment of the director title you should think about whether you are ready for the responsibility. If you do accept the responsibility then there is little to worry about providing you do not abuse your position and always act in the best interests of the company. Although it is not always necessary for directors to evidence all of their thought processes, it is good practice to record all decisions made by the directors that affect the company in board minutes. If things go wrong in the future as a result of these decisions a director can refer to the minutes as evidence showing that they always had the best intentions of the company at heart and have therefore not breached their duties towards it.

For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.