The Companies Act 1993 sets out your core duties as a director. These are legal obligations, not just good practice suggestions. Breaching them has real consequences.
Section 131: Good faith and best interests
You must act in good faith and in what you believe to be the best interests of the company. This is the fundamental duty underlying all others.
"Best interests of the company" means the company as a whole, not any particular shareholder or group of shareholders. Even if you were appointed by a particular shareholder, your duty is to the company.
Practical implications
- Cannot put personal interests ahead of company interests
- Cannot favour one shareholder over another
- Must consider long-term interests, not just immediate gains
- Since 2023, may consider environmental, social and governance factors
Section 133: Proper purpose
You must exercise your powers for a proper purpose. Director powers exist for the benefit of the company, not for collateral purposes.
For example, issuing new shares to dilute an unwanted shareholder would be an improper purpose, even if you thought it was good for the company overall.
Section 135: Reckless trading
You must not agree to, cause, or allow the business to be carried on in a manner likely to create a substantial risk of serious loss to creditors. This duty becomes critical when a company faces financial difficulty.
Warning signs. If your company is having trouble paying creditors on time, cannot meet wages, or is relying on delayed payments to survive, you need to consider your position carefully. Continuing to trade in these circumstances may expose you personally.
Section 136: Incurring obligations
You must not agree to the company incurring an obligation unless you believe on reasonable grounds that the company will be able to perform when required. This is closely related to reckless trading but focuses on specific obligations.
Section 137: Care, diligence and skill
You must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. This is an objective standard, though it takes into account the particular company and your role.
What is reasonable depends on factors like the size and nature of the company, the particular decision being made, and your role and expertise. A director with financial expertise is held to a higher standard on financial matters.
2023 ESG amendment
Since 2023, directors may consider environmental, social, and governance matters when acting in the company's best interests. This does not create a new duty, but clarifies that considering stakeholder and sustainability issues is permissible within the existing good faith framework.
What we do at this stage
We explain how these duties apply in practice. Abstract legal principles are one thing; understanding what they mean for the decisions you face is another. We help you navigate specific situations where your duties may be engaged.