Becoming a Company Director and Your Responsibilities
A comprehensive guide on everything you need to know if you’re considering becoming a director for a limited company
Directors of limited companies have to observe a range of rules and duties. Failure to follow these can result in fines, personal liability for the company’s debts, disqualification from acting as a director for up to 15 years and even imprisonment.
This guide looks at the role and responsibilities of directors of limited companies, and at how to make sure you keep within the law.
Who can be a director?
Anyone can become a director, with a few exceptions:
- Anyone disqualified by the company’s own Articles of Association (the rules relating to the running of the company).
- An undischarged bankrupt.
- Someone disqualified by a court order.
- The company’s auditor.
Directors don’t have to be shareholders or even employees of the company. If you do work full or part-time for the company, however, you may need to have a director’s service contract. You may need to register this, and keep a copy for inspection at the company’s registered office.
Be aware that if someone effectively acts as a director, whether or not they have the title, they may be regarded legally as a director. For example, this applies to someone, other than an expert specialist adviser, on whose advice the directors of a company are accustomed to act. This person may be viewed as a shadow director.
Duties of a director
Directors hold a position of trust on behalf of shareholders and direct the company’s operations on their behalf. They act through the Board, which usually controls company business.
The extent of the directors’ authority depends on the company’s Articles of Association. Before you become a director, take legal advice on the extent of your obligations.
As a director, you have several duties:
- To act within your powers and make sure the company follows its constitution as set out in the Memorandum and Articles of Association.
- To act in good faith to promote the success of the company for the benefit of its members. You must also have take into consideration employees, suppliers, customers, the environment and the community.
- To carry out your duties with reasonable care and skill. Higher standards may be expected from executive directors who are responsible for an area in which they have a specialist or professional qualification.
- To exercise independent judgement.
- To make sure that there is no conflict of interest and duty. You must not take bribes, and must disclose any personal interests to the company. You must not divert business opportunities to yourself that ought to be available to the whole company.
- To make a declaration of interest where appropriate. You may not be allowed to vote on matters if there is a conflict of interests.
- Not to benefit from a third party by reason of your being a director, or by doing or not doing something.
- Not to act with intent to defraud creditors or for any other fraudulent purpose.
- Not to engage in wrongful trading, that is, allowing the company to carry on trading when you know (or ought to know) that it is insolvent. This can lead to personal liability.
- To carry out the statutory obligations imposed by the Companies Act 2006 and other legislation.
Directors are personally liable for certain actions taken while fulfilling their duties. Several laws give rights of action against directors in their personal capacity, including:
- The Insolvency Act 1986 which leads to personal liability where directors allow the company to trade wrongfully or fraudulently.
- The Health and Safety at Work Act 1974.
- Laws relating to the control and disposal of hazardous waste.
Some directors take a less active role in the management of a company and are known as non-executive directors. However, there is no distinction in law between directors, and all have the same duties. So if you are a non-executive director, it’s vital that you know what your fellow directors are doing and what the real state of the business is.
Position of trust
Directors must be extremely careful if they want to take advantage of an opportunity for private profit in an area of activity similar to that of the company – even if the company has rejected the particular proposition. For example, you should always take advice before buying or selling any assets from or to the company. Shareholders’ approval is needed before a director, or someone connected with the director, may acquire a substantial company asset, or vice versa.
If a director profits personally from his or her position, even if the company itself hasn’t suffered because of their action, a court can order him or her to pass on any profits made to the company.
Legal duties of directors
In a company, you may have several roles – as well as acting as a director, you may also own shares, lend the company money and guarantee loans. When there is a conflict of interests between your various roles, the courts will usually support you if you can show you have acted honestly and reasonably.
You must also provide Companies House with statutory information concerning shareholders and directors and, of course, for filing your accounts. If you don’t do this, you could be fined.
Be very careful when negotiating contracts with outside parties on behalf of a company that is yet to be formed, as you may be personally liable for anything you negotiate. Indeed, unless the other party agrees to the contrary, the deal will actually be seen as one entered into by the would-be director acting on their own behalf.
Make sure that the company’s full name is displayed at the registered office and on cheques. All company letterheads must show the registered office and business address, if this is different, along with the company number. You must put all or none of the directors’ names on letterheads.
You have a statutory duty to prepare accounts, which are usually presented at the annual general meeting of shareholders. You should be able to interpret these because you are responsible for either producing them, or for providing accurate information to an auditor so that they can be prepared. You also have to sign to confirm that they are accurate. Copies of these accounts must be submitted to the Registrar of Companies within ten months of your year-end or you will be fined.
Accounts have to be independently audited, although small and medium-sized companies may be able to file abbreviated accounts at Companies House, and very small or dormant companies may be exempt from audit altogether. Your accountant will be able to give you details about the type of accounts which you need to prepare. You must keep all paperwork safe. Legally, you must keep:
- Petty cash records, bank paying-in counterfoils, goods in and out records, and all company records, including personnel records, for six years.
- Annual earnings summaries for 12 years.
- Registers of directors and secretaries, applications for share documents, pension fund investment details, corporate balance sheets and minutes of general meetings permanently.
The company may not pay for goods and services which you receive personally.
Other disclosure requirements
The Memorandum of Association, filed at Companies House, should contain the company’s name, registered office and objectives. The Articles of Association outline the rules about how the company will be managed. These can be the standard ones set out in the Companies Act 1985, or the board can set out its own.
Professional advisers often recommend you adapt the standard Articles so that they suit the requirements of your company in relation to issues such as the circumstances in which (and the parties to whom) shares can be sold.
Directors must inform Companies House of changes in the company’s registered address, directors and secretary, along with the annual returns and certain specified resolutions.
When you issue shares, you must comply with the Companies Act 1985 and Financial Services and Markets Act 2000 and the company’s Articles of Association.
Unless a company opts out of the obligation to hold annual general meetings for the shareholders, it’s necessary to hold those meetings every year. You are not legally required to hold board meetings for directors, although it is good practice to do so. Make sure that all directors are given reasonable notice to attend board meetings.
You should always appoint someone to take minutes. These need to be published at the next board meeting and approved.
Directors often attend meetings in two capacities: as a manager and as a board member. The emphasis of the meetings must be on directing rather than managing.
If you disagree with a point raised at the meeting, be sure that it is recorded in the minutes, even if your motion is not carried.
A Director’s Liabilities
Although directors are responsible for making sure the company complies with the law, you could become personally liable if there is fraud, or in some cases, negligence.
Directors can be found individually liable if they act negligently or in breach of trust. You can get insurance which will protect you against the financial consequences of such a finding, but make sure you double-check any exclusions on the policy.
A company’s directors are often asked to give personal guarantees for loans, overdrafts and other financial liabilities. Think through the implications of this carefully – if your guarantee is secured by a mortgage on your house, for example, you could lose your home if things go wrong. Always seek professional advice first.
Liability for the company’s debts
Companies have limited liability. This protects directors and shareholders, except when they may have undertaken to contribute capital to the company, or can be called upon to do so – for example, with partly paid shares.
If the company gets into financial difficulties, seek professional advice immediately. While directors normally have no personal liability for the company’s debts, there are situations where it may be possible for creditors to claim from them personally.
Directors and borrowing
There are strict statutory limits on how much directors can borrow from the company, though loans by directors to their companies are legal and quite common. You should speak to your accountant about the tax implications of borrowing from the company.
Handling capital issues
Directors can only distribute the company’s profits after tax by way of taxable dividends according to the rules laid down in the Articles of Association.
If you believe that the company is at risk of becoming insolvent, don’t put creditors or guarantors at a disadvantage in recovering their debts from your company by increasing the company’s liabilities or transferring or selling the company’s assets.
Also, be careful when selling company assets – you shouldn’t sell them for less than they are worth and, in certain circumstances, you will need to seek shareholders’ agreement first.
If a company finds itself in financial trouble and carries on trading to the detriment of its creditors (a practice known as wrongful trading), any director who should have concluded the “point of no return” had been reached, can be held personally liable for the debts if the company then goes into liquidation. Directors must therefore be aware of the company’s financial status and ensure that someone competent monitors its solvency.
However, a director can be cleared of this liability if a court is satisfied that when the director realised that the company was not able to recover, he or she took reasonable steps to minimise potential losses to creditors.
Other factors that may help convince a court that you acted properly include making sure that:
- The board was properly constituted.
- Board meetings took place with detailed agendas of what was to be discussed.
- Board meetings were properly minuted.
- Proper management information was provided and records kept.
If a director is successfully sued for damages, he or she may claim a contribution from anyone else who is also found to be responsible. However, a court can lift this liability wholly or partially if it is satisfied that you acted honestly and reasonably and, on balance, ought fairly to be excused.
Resigning as a director
As a company reaches the “point of no return”, directors may feel tempted to resign. However, this does not necessarily free them from their obligations and liabilities:
- Directors must be seen to have taken positive steps to do everything they could to ensure that the magnitude of a company’s problems – or their perception of them – is brought to the attention of the full board of directors.
- Directors should also try to make sure that the company takes all the steps necessary, including seeking professional advice, to try to recover.
Directors are not automatically disqualified from being directors of other companies because one company they worked for went into liquidation. Only a court can order disqualification.
This Becoming a Company Director and Your Responsibilities business advice article published in association with Lloyds TSB.
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