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Company directors are responsible for the management of their companies. They must act in a way most likely to promote the success of the business and benefit its shareholders. They also have responsibilities to the company’s employees, its trading partners, and the state.
As a director, you need wide powers to help you promote the company. However, you face serious penalties if you abuse those powers or use them irresponsibly.
1. Appointing directors
Every private limited company must have at least one company director. At least one of the directors must be an actual person (as opposed to another company).
The first director(s) are appointed by the shareholders who form the company
- Directors are often also shareholders or employees of the company, but do not have to be.
Subsequent appointments must follow rules set out in the articles of association
- These typically include procedures and maximum numbers.
- Usually, the board can appoint a new director or the shareholders can appoint a person recommended by the board or proposed as a director in advance.
You can appoint both executive and non-executive directors
- If you are a director but have no executive position within the company, you are classed as a non-executive.
- Non-executive directors still carry the same responsibilities as other directors, even if they have nothing to do with the day-to-day running of the company.
Even if not appointed, you could be classed as a shadow or 'de facto' director
- You may be a shadow director if the other directors act under your instructions.
- You may be a 'de facto' director if you act as if you were one - for example, if you resign your directorship but continue making decisions as a director.
- As a shadow director or a de facto director, you carry many of the legal responsibilities, and are subject to many of the penalties, of other directors.
Some people are debarred from becoming directors
- Auditors may not be appointed directors of the companies for which they act.
- People who have been disqualified may not be appointed.
- Undischarged bankrupts may not be appointed unless they have first obtained leave from court.
- Directors must be aged at least 16 or over.
Details of directors must be reported to Companies House
- The appointment, departure or change of particulars of any director must be reported to within 14 days, using the appropriate form.
The rules on corporate directors are changing
- From October 2016, it will not normally be possible to have a director that is a company (as opposed to a natural person).
2. Exercising directors’ powers
Check if there are any limits on directors’ activities in your company.
Check if there are any restrictions listed in the articles of association
- Companies set up since 1 October 2009 are not restricted in their objectives (‘objects’) unless their articles of association say otherwise.
- Companies set up prior to 1 October 2009 listed their objectives in the memorandum of association. These are now automatically deemed to be part of the articles unless a resolution to remove them has been passed.
- If the directors act outside the company’s objects, the company may be entitled to take legal action against them.
- You can only change the company’s objectives by getting shareholder agreement.
You must act within the powers granted in the articles of association
- The articles of association define the rules governing how the company is to be run, including what the directors’ powers and responsibilities are.
- The articles also set out how decisions are to be taken. For example, the procedures for calling a board meeting and how many directors are needed to vote on a proposal.
In exercising directors’ powers, you must show reasonable skill
- You are required to exhibit ‘such a degree of skill as may reasonably be expected’ from a person with your knowledge and experience.
- For example, a chartered accountant might be expected to know if the company was trading while insolvent.
You must also exercise a degree of care in your actions as a director
- The test of an acceptable level of care is what a reasonable person would do in looking after their own affairs.
- You are generally not liable for the actions of your fellow directors, if you knew nothing about them and took no part in them, but you have a duty to make sure you are informed about the company's affairs.
3. Fiduciary responsibilities
As a director, you must act in a way which you think is most likely to promote the success of the company for the benefit of its shareholders. You need to consider a number of statutory factors, including the long-term consequence of decisions, your firm's reputation and the interests of other stakeholders such as employees and the community.
The company is a separate legal entity from its directors, shareholders and employees
- The best interests of the company are not always the same as the best interests of the shareholders.
- You must consider the interests of other stakeholders such as creditors and employees.
- You must consider the long-term prospects of the company and its reputation.
You must give equal consideration to all shareholders
- Even if you hold most of the shares, or act as the nominee of the major shareholder, you must consider the interests of shareholders as a whole.
- In practice, it is very difficult for a minority shareholder to have a significant say in decisions made by majority shareholders.
You must not use your position to make private profits at the company’s expense
- If you are found to have secretly profited from a contract, you might be forced to hand those profits over to the company.
You are legally obliged to declare any actual or potential conflict of interest
- For example, if you have interests in another company with which your company is planning to do business.
- The articles of association may say you should not vote on such a deal and, if you do, your vote is disregarded.
Substantial deals between the company and you must be approved by the shareholders
- This also applies to deals involving someone connected with you, such as a relative.
Your contract of employment must normally be approved by the shareholders
- This applies if your term of employment is capable of exceeding two years.
- The shareholders must approve the contract in a general meeting.
4. Responsibilities under company law
Directors are personally responsible for ensuring that the company complies with company law. These duties are usually delegated to the company secretary (if the company has one) or to a director or trusted employee. However, you must ensure that these responsibilities are carried out.
You must make sure that the statutory returns are filed with Companies House on time
- These include the annual directors’ report, strategic report (unless the business qualifies for the small company exemption) and accounts, the annual confirmation statement, notice of changes to directors and secretaries and register of people with significant control.
- The annual confirmation requires businesses to confirm that the information held by Companies House is correct at least once a year. This replaced the annual return from June 2016.
- Micro-businesses are only required to produce a simple balance sheet and profit and loss account.
- A company is a micro-business if it satisfies any two of the following: ten employees or fewer; turnover of not more than £632,000; balance sheet of not more than £316,000.
- Failure to deliver can result in fines for which you may be personally liable, disqualification or criminal conviction.
All companies have to file accounts with Companies House
- In most cases small and medium-sized companies can submit abbreviated accounts. Small companies do not generally need to have their accounts audited and as such are not required to appoint an auditor.
- A company is small if it satisfies any two of the following: a turnover no more than £10.2 million; a balance sheet no more than £5.1 million; 50 or fewer employees.
- Directors are required to sign a declaration acknowledging their responsibilities with respect to accounting records and the accounts.
Most private companies are no longer obliged to hold an AGM
- They must give adequate notice of and hold one if any director or 5% of members request it.
- Private companies with traded shares must still hold an AGM.
- If you do hold an AGM, you must give appropriate notice (usually 14 days) and ensure minutes record all decisions. This could protect you if you face legal action.
You are no longer required to circulate copies of the annual accounts for approval
- However, members must be sent a copy before they are filed with Companies House.
- A director must sign the balance sheet and approve and sign off the directors’ and strategic reports.
You must provide company details on business stationery and elsewhere
- You must ensure that the company’s business stationery, website, order forms and emails carry its name, registered number, country of registration and registered address.
5. Other legal duties
You must comply with employment law in dealings with employees
- You (personally) can be sued for unfair dismissal, discrimination or unfair work practices, such as unequal pay.
- Act quickly to ensure the company complies with any new employment laws.
You must take reasonable care to ensure the health and safety of your employees
- You can be prosecuted for dangerous practices started or continued with your consent, or illness or accident attributable to your negligence.
- You must undertake a risk assessment. If you have five or more employees, you must record this in writing and have a written health and safety policy.
You must pay the correct amounts of tax, VAT and National Insurance on time
Watch out for legal pitfalls in other areas
- These include data protection, defamation, libel and providing misleading information.
6. Potential penalties
Exercise your responsibilities carefully as the penalties for failure to do so can be severe.
Even in a limited liability company, you might be held personally liable for losses
- These include losses arising from illegal acts such as wrongful or fraudulent trading, and acts beyond your powers or undertaken with insufficient skill and care.
Directors can be jointly and severally liable if you act collectively in breach of your responsibilities
- Liability could be unlimited, so you could be made bankrupt as a result of decisions of the other directors, even in a limited liability company.
- If you disagree with the decisions being made, have it noted in the minutes, including your reasons for disagreeing.
You could be disqualified from acting as a director for some types of conduct
- They include continuing to trade when the company is insolvent, failure to keep proper accounting records, failure to pay tax and failure to co-operate with the official receiver.
- Disqualification lasts from two to 15 years.
Some actions could result in criminal convictions
- They include failure to keep proper accounting records, fraudulent trading, health and safety shortcomings and misappropriation of company funds.
You will be guilty of wrongful (or even fraudulent) trading if you allow the business to carry on and incur debts when you know there is no reasonable prospect of the company repaying them. If you do, you could be held personally liable for the company's debts if it subsequently becomes insolvent.
A company can be loss-making without necessarily trading wrongfully
- But if there is no reasonable prospect of it moving into profit, and there are doubts about whether its assets will cover its liabilities or whether it can pay its debts, the company is probably trading wrongfully.
The value placed on assets may be critical
- The values as stated in the balance sheet are on a going-concern basis. The value of any assets will be much lower in a forced sale. This is particularly true with intangible assets, such as goodwill.
Allow for the expenses of winding up the company in calculating your liabilities
7. Avoiding danger
Monitor the financial situation of the company continuously
- You should do this whether or not you are the financial director.
Take steps to minimise losses if the company is in, or faces, financial difficulties
- Ask an insolvency practitioner to advise the board. Take detailed minutes of the meeting.
Make sure that minutes of directors' meetings are maintained in any event
- They could protect you against future legal action, particularly where there have been boardroom disagreements.
Keep in mind what you can and must do
- If necessary, review the requirements of your employment contract and powers granted under the articles of association.
Whenever possible, avoid giving personal guarantees for the company's debts
- Always negotiate to limit the extent of any guarantee (eg by limiting its duration).
Consider directors’ and officers’ liability insurance
- This will pay for legal expenses, and sometimes, damages awarded against you, if you are sued.
- The company may also be able to indemnify directors.
- Read guidance on directors’ duties and responsibilities from the Institute of Directors.
- Find companies guidance from Companies House (0303 1234 500).
- Read guidance on the recent changes introduced by the Small Business, Enterprise and Employment Act from Companies House.
- Find postal forms or file online with Companies House.
- Find a solicitor for advice on your legal responsibilities through the Law Society.
"The principal responsibility of the directors is to the company’s shareholders, so always ensure you communicate with them on significant matters." - Martin Dunne, Sayers Butterworth LLP