A Guide To Directors’ Responsibilities
The most senior people in your company bear the brunt of responsibility for how it is run. Find out more about the requirements here
As the people responsible for the management, direction and overall strategy of a company, directors are the most important people in your company.
You and the other directors have a wealth of responsibilities to bear; to your shareholders, trading partners, employees and the state, as well as to the business itself. As a director, you are given wide-ranging powers to help you fulfil these responsibilities and manage the company – but you face serious consequences should you misuse those powers.
This article is intended to give you an overview of how company directors work; from appointing them to managing your powers, all the answers to the pressing questions you have as a business should be answered here.
As the business owner, how do I appoint directors?
If you are a private limited company, you must have at least one director, and at least one of your directors must be a real person.
When you form (register) your company, the first director or directors should be appointed by the original shareholders or founders. These are often employees of the company, founders, or shareholders themselves – although there is no rule that says they have to be.
After the company is formed, additional director’s appointments should be in line with the rules set out in your business’ written Articles of Association. Most of the time, these say that the board of directors itself has the power to appoint a new director – or that shareholders have the power to approve an appointment recommended by the board.
If you obtain substantial capital investment in your company, it’s not unusual for directors to be appointed by your new shareholders to oversee their stake. If they do not hold employee or executive roles within the company itself, they are known as non-executive directors. Although they may not undertake day-to-day responsibilities for how the company is run, they are still subject to most of the same rules and responsibilities as executive directors.
It is also important to note that you cannot duck out of your director’s responsibilities by not officially appointing yourself director but continuing to run the company. If you are not appointed a director but continue to act as if you were – if you have no official role within the company but the other directors act under your instruction, for example – you are classed as a ‘de facto’ or ‘shadow’ director, and again you are subject to most of the responsibilities and legal restrictions of other directors.
People who have been disqualified (see below), bankrupts (unless they obtain special leave from a court), children under 16 and auditors who act for a company, can’t become directors. Remember that whenever a director is appointed, leaves or changes his role in the company, you must report this to Companies House within 14 days.
What is meant by my ‘fiduciary duty’ as a director?
It is not a phrase you might have come across in day-to-day life, but ‘fiduciary duty’ simply refers to your duty as a director to promote the success of the company as a whole. This might sound simple enough, but you need to take into account a number of factors when making decisions that affect the company.
First of, your fiduciary duty is to the company – not the shareholders, directors or employees. The best interests of your shareholders and those of the company might not always coincide; you need to consider the long-term effects of a decision on the company as a whole, as well as any outside stakeholders such as creditors. Secondly, you must treat all shareholders equally – even if you hold the vast majority of the shares yourself, any other shareholders must be considered. In reality, if a shareholder has a tiny stake it will be difficult for them to have any major say in the running of the company.
Also you must not make profit at the company’s expense and declare any actual or potential conflicts of interest – this is even if you think the conflict is irrelevant or will not affect your decision making. Finally shareholders must approve your personal dealings with the company and approve your contract of employment in a general meeting – if this term is likely to be longer than two years.
What are the limits of directors’ powers?
Company directors have a very broad range of powers; they are responsible for the management of the company as a whole and as such can use all the powers of the company to do so. However, these powers are subject to a number of important limits:
The Articles of Association
If a director acts in a way that is outside the stated objectives of the company, the company itself might be entitled to take legal action against them. This is particularly relevant to companies formed before 2009, which were required to list their objectives when they registered; companies formed afterwards have no restriction on their objectives. Remember you need to get the consent of your shareholders in order to change the company’s objectives. More generally, the Articles of Association will define your powers and responsibilities as a director, and how decisions are to be taken, and you must act within those powers in order to comply with your duties.
The requirement to exercise ‘reasonable skill, care and diligence’ in exercising directors’ powers
What ‘reasonable skill’ means is contextual and is based on what someone with your knowledge and experience as a director should know. So if you have a professional qualification in a field such as law or accountancy, you will be held to a higher standard in those areas than a person who is unqualified. In addition, you are required to show a degree of care when carrying out your directors’ duty; this is measured by what a reasonable person would do if they were looking after their own affairs. You are not generally liable for the actions of other directors if you didn’t know about them, although you do have a duty to keep informed about the company’s affairs.
Where does company law fit in with a director’s responsibilities?
You and the other directors are responsible for ensuring your business’ compliance with the law. In practice, these duties are normally delegated to someone within the company like a company secretary, but it is your duty to make sure that someone fulfils these responsibilities.
Directors’ duties under company law include:
Filing returns on time
You must file any notifications and returns with the Registrar of Companies on time. This includes information like annual accounts, the directors’ report, and notices of changes to directors and secretaries. Businesses with less than ten employees, turnover of £578,330 or less (or £289,415 profit) are only required to provide a simple balance sheet and profit and loss account.
All limited companies have to file accounts with Companies House, although small and medium-sized firms (turnover of less than £6.5m) generally submit simplified or abbreviated accounts and do not need to appoint an external auditor. As a director, you must sign a declaration which acknowledges your responsibility for your company’s accounts and accounting records.
Annual General Meeting (AGM)
Most companies are no longer required to hold an Annual General Meeting, which is a yearly meeting to elect the board of directors and keep shareholders up to speed on current and future activities. You are required to hold one if any director or 5% of shareholders request it, though, and if so you must give adequate notice (at least 14 days) and take minutes of all decisions.
You are responsible for ensuring that the company’s name, registered number, country and registered address appears on all stationery, your website, order forms and emails.
Are there any other duties company directors have to comply with?
Apart from the special responsibilities and duties accorded to company directors, as the company’s representatives, you and the other directors must make sure the company is obeying the law generally.
What are the potential penalties for failing to comply with my responsibilities as a company director?
The consequences of failing in your duty as a company director can be very severe, so make sure to be judicious, careful and always stay on the side of the law when making decisions.
Some of the penalties that a company director could face are personal liability, you can be held personally liable for certain actions the company does such as fraud, or not exercising your duty as director with the required amount of skill and care. Also joint and several liability, where you and the other directors can be held collectively responsible for decisions you take as a whole – if you disagree with a decision being made by the board, make sure a record is made of this.
Other penalties to be aware of include disqualification, you can be barred from being a director for up to 15 years for certain types of behaviour and criminal convictions – for the most serious breaches, criminal proceedings could see you facing hefty fines and even prison sentences. Examples include siphoning off company funds, health and safety breaches, and fraud.
How do I steer clear of danger as a company director?
Despite the harsh potential penalties, following a few common-sense principles should mean you steer clear of trouble as a director.
Monitor your company’s financial situation closely – even if you are not directly responsible for the company’s finances. Minimise any losses and if the situation becomes serious, get advice from an insolvency expert at a board meeting. Also make sure to take minutes at directors’ meetings and remember your employment contract and Articles of Association.
Stay within the limits imposed on your power and do not give personal guarantees of the company’s debts where possible – if you have to, try and limit the effect of any guarantee ( such as through time limits)
Finally take out directors’ and officers’ liability insurance – this will protect you financially if you are sued for certain things such as negligence. Be aware that most policies are not comprehensive, though, and might not protect you against company failure or the cost of criminal proceedings.
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