Becoming a company director and your responsibilities

It sounds impressive to be able to say, “I’m a company director,” but you need to be aware of your responsibilities. A big advantage of a limited company is that the liabilities of its shareholders and directors are indeed limited. However, this comes at a price: directors have to observe a large raft of rules and duties. Failure to follow these can result in fines, personal liability, disqualification and even imprisonment. This guide looks at the role and responsibilities of directors of limited companies.

Who can be a director?

Anyone, with certain exceptions, can become a director. The exceptions include anyone disqualified by the Articles of Association, an undischarged bankrupt, someone disqualified by a court order, or the company’s auditor. Directors, however, need not be shareholders or even employed by the company.

On the other hand, as a director, you will normally be an employee of the company. As such, you will need a contract of employment as you would with any other employee. This will help to avoid problems if you sell or merge the company.

Be aware that anyone who acts as a director, whether or not they bear the title, will be regarded legally as a director. For example, if you attend and vote at a board meeting on a director’s behalf, then you come under the definition of a director. This also applies to someone, other than an expert specialist adviser, on whose advice or suggestions the directors of a company are accustomed to act. This person becomes a “shadow 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 the company business.

The extent of the directors’ authority depends on the company’s Articles of Association.

Before becoming a director

Ignorance is not a defence in law, so before you become a director, take advice on the extent of your obligations. As a director, you have several duties:

• To act honestly, in the best interests of the company. This means you must disclose any interests before becoming a director. For example, once you are a director, you must not divert business opportunities to yourself that ought to be available to the whole company. 
• To carry out your duties diligently and honestly. Higher standards may be expected from executive directors working in an area for which they have a specialist or professional qualification and responsibility. Therefore, a finance director is expected to have a better understanding of the company finances than, say, an IT director.
• To act within your powers and ensure the company follows its constitution as set out in the Memorandum and Articles of Association.
• To look after the interests of the employees in general. For example, you must ensure that the company complies with health and safety legislation.
• Not to deceive shareholders.
• Not to disclose confidential information or trade secrets.
• Not to act with intent to defraud creditors or for any other fraudulent purpose.
• Not to engage in ”wrongful trading”, the act of trading with a business that you know to be insolvent. This can lead to personal liability.
• To carry out the statutory obligations imposed by the Companies Act and other legislation.

Directors are personally liable for actions taken while fulfilling their duties. There is a body of law giving rights of action against directors in their personal capacity, including the Health and Safety at Work Act 1974 and legislation relating to the control and disposal of hazardous waste.

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 itself rejected the particular proposition. For example, take advice before buying or selling any assets from or to the company.

Shareholders’ approval is required before a director, or someone connected with that person, may acquire a substantial company asset, or vice versa.

If a director profits personally from their position, even if the company itself hasn’t suffered because of their action, the court can order them to pass on any profits made to the company.

Legal duties

In a company, you may have several roles – you may own shares, lend the company money, and guarantee loans. Do not confuse these roles with that of being a director, which has other legal obligations that may come first. When there is a conflict, the courts will usually support you if you can show you have acted honestly and reasonably.

You are also responsible for providing Companies House with statutory information concerning shareholders and directors and, of course, for filing your accounts. Failure to complete and file documentation can lead to fines.

Stationery

Ensure that the company’s full name is displayed at the registered office and on all 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.

Accounts

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 them. Copies of these accounts must be submitted to the Registrar of Companies within 10 months of your year-end or you will be fined.

This means ensuring that the company keeps proper records and that, when the company’s turnover crosses the small business threshold, the accounts are independently audited. Your accountant will be able to give you details of the current small business threshold.

Keep 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 you receive personally.

Other disclosure requirements

The Memorandum of Association, filed at Companies House, should contain the company’s name, registered office and the objectives of the company. 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, or the board can set out their own. Professional advisers often recommend you amend or opt out of the standard Articles so as to adopt rules more acceptable to you on certain issues, such as the disposal of shares.

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.

Shares

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. You may offer part-paid shares but must not sell them at a discount.

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 are personally negligent but you can insure against this, and against breach of trust. Double-check the 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 before proceeding – if your guarantee is secured by a mortgage on your house, you could lose your house if things go wrong. Get professional advice before signing any document.

Borrowing

There are strict statutory limits about how much directors may borrow from the company, though loans by directors to their companies are legal and quite common. Be aware of the tax implications of borrowing from the company.

Handling capital issues

Directors may only distribute the profits after tax by way of taxable dividends according to the rules laid down in the Articles of Association.

Don’t put creditors or guarantors at a disadvantage by increasing the company’s liabilities or transferring or selling the company’s assets.

And be careful when selling company assets – do not sell them for less than they are worth or, in certain circumstances, without shareholders’ agreement.

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, take professional advice fast. 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. The company may be able to reschedule debts using a Company Voluntary Arrangement. However, it will need to have most of the creditors on side to achieve this. The alternative may be to call in a liquidator or a receiver. You must be careful not to give particular creditors preferential treatment meanwhile.

If, when a company finds itself in financial trouble, it 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 if the company then goes into liquidation, can be held personally liable for the debts. So directors must 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 steps that a reasonably diligent person would take to minimise the potential loss to creditors.

Other factors that may help convince the courts that you acted properly include:

• That the board was properly constituted.
• That board meetings were held which had detailed agendas of what was to be discussed.
• That board meetings were properly minuted.
• That proper management information was provided and records kept.

If a director is successfully sued for damages, they 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.

Before resigning

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. 

• They 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.
• They should also try to ensure that the company takes all the steps necessary, including seeking professional advice, to try to effect recovery.

Resignation should only be necessary if fellow directors ignore their suggestions. This process may not take long and resignation could follow soon after a director realises that the company is beyond help.

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.

Meetings

There is no legal requirement to hold board meetings, although it is good practice to hold them and to make sure that proper minutes are kept. Ad hoc chats are not a good substitute. Ensure that all directors are given reasonable notice to attend board meetings.

Not holding proper meetings or keeping adequate minutes could make you much more vulnerable against a charge of wrongful trading should problems occur.

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.

Appoint someone to take minutes. These need to be published at the next board meeting and approved.

Before incorporation

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.

Non-executive directors

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 is vital you know what your fellow directors are doing and what the real state of the business is.