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 and the first director(s) are appointed by the shareholders who form the company.
- 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.
- Some people are debarred from becoming directors – Auditors may not be appointed directors of the companies for which they act or people who have been disqualified, have undischarged bankrupts or under 16.
- 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.
2. Exercising Directors’ Powers
- Check if there are any restrictions listed in the articles of association – If the directors act outside the company’s objectives, 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.
- 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.
- 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 and your contract of employment must normally be approved by the 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.
- 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.
- 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 and you must consider the interests of other stakeholders such as creditors and employees. You must also consider the long-term prospects of the company and its reputation.
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.
- All companies have to file accounts with Companies House – in most cases small and medium-sized companies can submit filleted accounts. Small companies do not generally need to have their accounts audited and as such are not required to appoint an auditor.
- Most private companies are no longer obliged to 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 and 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 websites.
5. Other Legal Duties
- You must pay the correct amounts of tax, VAT and National Insurance on time
- 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 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.
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.
- 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.
- Wrongful trading – 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.
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.
If you’d like to know more about what is required of a limited company director, please contact Jessica.