In today’s highly regulated business climate, it is vital to understand the responsibilities involved in taking on the role of company director. In this article, Nottingham chartered accountants Clayton & Brewill takes a look at what it means to be a director, and what general duties you are required to do in accordance with company law.
A director is a person responsible for the management of a company. Anyone can be a director, subject to certain exclusions. You can be eligible if you are over 16 years old and, very broadly speaking, have neither been bankrupt nor the subject of a disqualification order.
Being a director is far more than simply a matter of holding an official title. It involves carrying out a central role. Serving as a director entails risk and responsibility as well as reward and imposes a high standard of behaviours.
You can be appointed as director; this will be the case for most directorships. You can also be considered a director if you act as one. This is known as being a ‘de facto’ director. You could be a de facto director if, for instance, you carry on acting as a director after your formal appointment has ended. Directors in family companies may need particular care in this area.
You could be considered a ‘shadow’ director if you have a commanding influence on the directors. The Companies Act defines a shadow director as ‘a person in accordance with whose directions or instructions the directors of a company are accustomed to act’. Shadow directors are subject to many of the statutory responsibilities that apply to appointed directors. They can also be subject to director disqualification proceedings.
Responsibilities of a director in company law
The Companies Act 2006 sets out seven major responsibilities for directors. These duties should also be considered by shadow directors. Even if you are no longer a director, some duties will still apply. The seven duties are:
1. Act within powers
You must act in accordance with the company’s constitution, using your powers only for the purpose for which they are given. The constitution consists of a company’s articles of association and any resolutions or agreements related to them.
2. Promote the success of the company
You must act in the way that you consider, in good faith, most likely to promote the success of the company, for the benefit of its members as a whole. ‘Success’, measured as long-term increase in value, must be balanced by other factors. Such factors include the likely long-term repercussions of company decisions; the interests of company employees; the fostering of business relationships with suppliers, customers and others; as well as the company’s operating impact on community and environment. You should also remember the need to act fairly as between members of the company.
3. Exercise independent judgment
You must act independently, making your own decisions. This does not stop your acting in accordance with the company’s constitution, or an agreement entered into by the company.
4. Exercise reasonable care, skill and diligence
You must exercise reasonable care, skill and diligence. This involves not just the general knowledge, skill and experience that might reasonably be expected of someone carrying on your role in the company, but also the general knowledge, skill and experience you actually have. If for example, you are particularly skilled in finance or IT, more could be expected of you in these areas.
5. Avoid conflicts of interest
You must avoid any situation where there could be a direct or indirect interest conflicting with the company’s interests. This has a particular bearing on the exploiting of any property, information or opportunity, whether or not the company could actually take advantage of it. Former directors have responsibilities around the exploitation of property, information and opportunities they became aware of during their directorship.
Visibility around decision-making is key. Think carefully about occasions when you might take on personally an opportunity the company has turned down; or any situation where you are a director of more than one company, where there could be a possible clash of interests. A situation where you act as an advisor to the company, or to a competitor, say, as an accountant or consultant, might also need close scrutiny. Look out for situations involving someone connected with you, such as a spouse, partner or close family member too.
6. Not to accept benefits from third parties
You should not accept any benefit from a third party given because you are a director, or because of anything you do – or don’t do – in that capacity. This covers for example, taking bribes, but is more far-reaching than this. The provision of hospitality or gifts, for instance, should be considered carefully. Former directors still have responsibilities in this area.
7. Declare interest in a proposed transaction or arrangement
If you are in any way – directly or indirectly – interested in a proposed transaction or arrangement with the company, you should declare this to the other directors before the company proceeds. Formalities prescribe how this should be done.
Other responsibilities: accounts and records
As a director, you are responsible for the general management of the company. Even if delegating some activities, ultimate responsibility still lies with you. Directors have particular responsibilities for accounts and records, especially the keeping of ‘adequate accounting records’ and preparation of accounts in accordance with the Companies Act.
All companies have to submit accounts to Companies House, although the detail varies for micro-entities, small, medium and dormant companies. Running a limited company also involves keeping records about the company, such as a register of ‘people with significant control’. Directors are responsible for submitting timely information to Companies House. Failure to do so can be a criminal offence. Required information includes the annual confirmation statement, annual accounts, and notice of change in company officers or their personal details.
Transactions between company and directors
Even where you are both a shareholder and a director, it is important to remember that the company is a distinct legal entity. Therefore, some transactions between the company, and you as director, are regulated by law. These include rules about directors’ remuneration and service contracts; loans to directors; the sale of company assets to a director; and purchase by the company of assets owned by a director.
The terms of directors’ remuneration are determined by the company’s articles of association. Historically, this has needed shareholder approval. However, since 2009, it is sufficient for the directors to approve remuneration. Some directors have service contracts, which are also subject to specific company law requirements. The terms of a service contract must be open to inspection by shareholders, and shareholder approval is needed for contracts exceeding two years. Generally, companies must not make loans to directors without prior shareholder approval.
Minimising risk: how we can help
Failing to carry out your responsibilities as a director can have a significant risk. In the most serious instances, improper conduct could lead to disqualification from serving as a director, or being in any way concerned in the promotion, formation or management of a company for up to 15 years.
It is particularly necessary to exercise care if the company encounters challenging trading conditions, and there is any question as to potential solvency. In these circumstances, your responsibilities may change, requiring you to prioritise the interests of creditors rather than shareholders. Directors can be personally liable for wrongful or fraudulent trading if the company becomes insolvent. This is a specialist area, where professional advice should be sought.
At Clayton & Brewill, we can advise on easily implemented risk-reduction strategies. Our team is always on hand to discuss any aspect of company administration or profitability.