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Outlining the Obligations and Duties of Directors

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Directors’ Duties and Obligations

Responsible for the day-to-day running of a company, directors are expected to make decisions that are in the best interests of company stakeholders (a group that includes shareholders, employees, customers and suppliers). They, therefore, must put the interests of the company above their own personal interests.

In addition, directors are also expected to exercise reasonable care, skill and diligence while performing their duties. What that means is that they have a sufficient level of knowledge, skill and experience appropriate to the position they hold. To ensure that they are fulfilling this particular obligation, directors should keep themselves informed about the company’s affairs, helping them to make reasonable decisions based on the information available.

If the company is struggling financially, directors have a duty to avoid insolvent trading. If they suspect that the company is insolvent, it is important that the director takes suitable steps to prevent the company from incurring further liabilities.

It is also the duty of the director to ensure that the company complies with all applicable laws and regulations. Included in that duty is an obligation to maintain and provide accurate financial records which give an accurate view of the company’s financial position.

Fundamentally, directors have a duty to act honestly and lawfully to further the interests of a company in a socially and legally responsible way. Failure to do so can result in personal liability, including fines, legal action, and even disqualification from being a director in the future.

It is, therefore, important that directors take their duties and obligations seriously.

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How Loch Law can help

We can help you, as a director, to understand your duties and obligations by reviewing your company constitution and other governing documents to ensure that they are compliant with applicable legal regulations. We can also advise on the potential risks associated with specific business activities, such as mergers and acquisitions.

It’s not always smooth sailing as a director. We can assist with identifying and managing conflicts of interest, shareholder disputes and other legal issues that can put a bump in the road of your directorship.

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What happens if a director breaches their duties?

Directors are trusted to fulfil their duties in a socially and legally responsible way. Failure to do so could result in civil claims being taken against the director to recoup financial losses and compensate for damages.

If personal liability can be established, a director - much like any other officer of a company - can be taken to criminal court for offences that breach the Companies Act, Insolvency Act, Fraud Act or Theft Act.

What happens to a director of a company in liquidation?

According to UK law, directors of a company in liquidation no longer have any control over the company or anything it owns and cannot act on its behalf.

If the company enters into compulsory liquidation or creditors’ voluntary liquidation, you will be banned from forming, managing or promoting any business with a similar name for five years.

Can a director be an employee of the same company?

Yes, a director can be both an ‘office holder’ and an employee at the same company. In fact, it is very common for appointed directors to also hold the position of CEO or CFO.

It is important to note, however, that employees - members of staff who have an employment contract in place - are likely to have different legal protections in place and will likely be subject to different tax rules.

If you are a director who is also an employee, you must avoid any conflicts of interest that might arise from the situation. Failure to do so can lead to action being taken against you.

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