The legal framework

Complying with the law is a fundamental expectation of directors. The legal framework with which a director must comply will depend on in which sector of business they operate. For example, a not-for-profit will have a different legal environment to an SOE or public company. The director’s central duty is to act in good faith and in the best interests of the company.

Companies Act 1993

The Companies Act defines responsibilities for directors and boards. By law directors are expected to act in good faith, declare conflicts of interest, avoid reckless trading, comply with the directors’ duty of care, ensure a company remains solvent and in all ways comply fully with the Companies Act.

What does acting in good faith mean?

• the concept of good faith is covered by the legal principle of company law and is used to determine if a director has acted appropriately
• while directors can't be expected to know everything and get everything right, they need to demonstrate that their intentions are good and any decision made, or action taken, is reasonable in the light of their knowledge and experience:
  • if a director is in doubt they should get professional advice to demonstrate they acted in good faith
  • getting this wrong can be severe from hefty fines to imprisonment; ignorance is no defence in the eyes of the law
  • also, civil suits can be brought by disgruntled employees, creditors, customers and competitors.

Who can be a director?

There are no special qualifications required to be a director. However, you can't become a director if you are:

• under 18
• an un-discharged bankrupt
• not allowed to direct, promote or participate in the management of a company for any reason under the law, including having been convicted of an offence involving 'dishonesty' during the last five years
• subject to a property order made under sections 30 or 31 of the Protection of Personal and Property Rights Act 1988
• not qualified according to conditions laid out in the company's own constitution.