Directors’ duties and responsibilities

2. Who can be a director?

Whether you are already the director of a company, thinking about becoming a director or likely to take on a new director, it is important that you understand what the role is and exactly what it means.

Being a director of a limited company is an exciting proposition. The title 'Company Director’ sounds impressive and it is certainly nice to be able to tell friends, family and colleagues that you are on the board of a company. However, taking on a directorship is a serious undertaking. It is a position of responsibility and trust, and, as a result, there are a range of rules and duties you need to follow. Indeed there can be legal consequences if you operate outside these rules and duties.

There are no specific qualifications for being a company director but there are rules covered in the Companies Act:

• you must be over the age of 16
• you must not have been disqualified from acting as a company director
• you cannot currently be in bankruptcy
• you must not have been restrained by a court from becoming a company director
• you must not be disqualified by the company’s own Articles of Association (the rules relating to the running of a company).

It is up to the shareholders to appoint the people they believe can run the company well on their behalf. A private limited company must have at least one director.

Directors do not have to be shareholders or employees of the company. However, many company directors are also employees. Particularly in a start-up business, it is quite common for the founder(s) or owner(s) of the business to also be working in the business and, therefore, for them to be shareholder, director and employee.

If a director is an employee, either part-time or full time, it is recommended that they have a director’s service contract. This is quite simply a contract of employment for a director (as required under employment law and covered in detail in the Building a Great Team guide). As well as covering the general employment law requirements, it includes all the legal responsibilities required of the director, clarifies the agreement between the director and the company and can help avoid disputes.

Find out more about Directors and Governance with this BOSS course.

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3. Duties and responsibilities of a director

Directors hold a position of trust on behalf of the shareholders. As such, they have a number of duties, as well as legal and financial responsibilities.

Duties as a director

There may be some duties specific to your company, but there are 7 general duties that are included in the Companies Act 2006 that apply to all directors. Directors should be aware that they are personally subject to these statutory duties.

In addition, the company as a separate legal entity is subject to statutory controls and the directors are responsible for ensuring that the company complies with these statutory controls. The general duties set out in the Companies Act 2006 are:

1. Duty to act within your powers as a company director and make sure the company follows its constitution as set out in the Memorandum and Articles of Association.
    
2. Duty to promote the success of your company (not yourself).
    
3. Duty to exercise independent judgement.
    
4. Duty to use reasonable care, skill and diligence.
    
5. Duty to avoid conflicts of interest.
    
6. Duty not to accept benefits from third parties.
    
7. Duty to declare any interests in any proposed transactions or arrangements with your company.

You can find out more about these duties in greater detail at Companies House or access a copy of the Act on the Legislation Government website. 

Responsibilities as a director

As a company director you have certain financial and legal responsibilities. Although your accountant is likely to take care of the various filing requirements with Companies House and HM Revenue and Customs, remember you are ultimately responsible for meeting the deadlines and for ensuring that you keep and submit accurate records at all times.

Here are the legal and financial responsibilities of a company director:

• Annual return - this must be completed each year and returned to Companies House within 28 days of the anniversary of your company formation.
• Annual accounts – you must submit your company’s annual accounts to Companies House every year. This is a requirement whether the company is trading or not (is dormant).
• Corporation tax return – you must submit this annually to HM Revenue and Customs together with electronic payment for any taxes you owe.
• Changes in company personnel - you must let Companies House know of any changes in personal details of company officers. This includes changes of name, address, resignations, and so on.
• Change to the company’s registered office – you must let Companies House know of any change to the company’s registered address.
• Shares allocation – you must let Companies House know of any allotment of shares, changes to company share capital, certain special resolutions, or charges made.
• Comply with legislation – you must comply with all relevant legislation including employment rules, discrimination law, and health and safety regulations.
• Meet all tax obligations – you must ensure that you pay all taxes and National Insurance Contributions to HM Revenue and Customs on time for both you and your employees.
• Maintain accurate company records – you (or the company secretary) must maintain accurate company records at all times, including meeting minutes and the details of any resolutions passed by the directors.
• Trade solvently – you must always trade solvently and ensure that you are always able to meet the company’s tax liabilities.
• Act in the interests of your shareholders – you must always act in the interests of your shareholders, and not do anything which may cause damage to the company.

Further information about directors’ responsibilities are available at Companies House and full details of the Companies Act 2006 at Legislation website.

4. A director’s liabilities

Although directors are responsible for making sure the company complies with the law, you could be 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 protects you against the financial consequences of such a finding, but make sure you are fully aware of any exclusions on the policy.

A company’s directors are often asked to give personal guarantees for loans, overdrafts and other financial liabilities. Think very carefully about the implications of this – for example, if your guarantee is secured by a mortgage on your house, you could lose your home if things go wrong.

Always seek professional advice before making any such commitment.

Liability for company debts

A company has limited liability. This protects directors and if the company gets into financial difficulties, the directors normally have no personal liability for the company’s debts. However there are situations where it may be possible for creditors to claim from them personally.

Always seek professional guidance at the first sign of financial problems.

Directors and borrowing

Loans by directors to their companies are legal and quite common. However, there are strict statutory limits on how much directors can borrow from a company.

Make sure you 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 the company is at risk of becoming insolvent, don’t put creditors or guarantors at a disadvantage in terms of recovering their debts from the company by increasing the company’s liabilities or transferring or selling the company’s assets.

Also be careful when selling company assets. You should not sell them for less than they are worth and, in certain circumstances, you first need to seek agreement from the shareholders.

Wrongful trading

If a director allows a company to continue trading and taking credit from suppliers when no-one could reasonably expect the company to avoid liquidation, then the director can be held personally liable for the debts.

Directors must therefore be aware of the company’s financial status and ensure that someone competent monitors its solvency.

To avoid liability, a director should:

• seek independent professional advice
• ensure that there is up-to-date financial information – monthly accounts, cashflow projections, and a weekly cashflow forecast
• be careful not to take goods or services on credit if the financial position of the company is uncertain
• ensure that the basis for the decision to continue trading is documented and minuted by the board.

Documenting decisions formally can help directors to answer questions in insolvency proceedings and avoid disqualification proceedings.

Disqualification of directors

A disqualification order is made under the Company Directors Disqualification Act 1986. It disqualifies a person from:

• acting as a director of a company
• taking part, directly or indirectly, in the promotion, formation or management of a company
• being a liquidator or an administrator of a company
• being a receiver or manager of a company’s property

The order specifies the period of disqualification. For example, for orders made against an unfit director of an insolvent company, there is a minimum period of 2 years and a maximum period of 15 years.

Grounds for disqualification

There are many grounds for a director to be disqualified, for example:

• continuing to trade to the detriment of creditors at a time when the company was insolvent
• Persistent breach of statutory obligations such as failure to keep proper accounting records, failure to prepare and file accounts or make returns to Companies House, or failure to pay taxes
• failure to cooperate with an Insolvency Practitioner
• individual bankruptcy - unless the court allows the director to continue
• breach of Health and Safety regulations
• infringement of competition rules
• conviction of an indictable offence connected with the promotion, formation, management or liquidation of the company

No director is likely to be punished for commercial misjudgement. However, the court would need to be satisfied that there is a case for gross negligence or total incompetence.

Resignation as a director

As a company reaches the ‘point of no return’, directors may be tempted to resign. This does not, however, release them from their obligations and liabilities.

Directors must be seen to have taken positive steps to do everything they could to make sure the company’s problems are brought to the attention of the full board of directors. Directors should also make sure that the company takes all the steps necessary to try to recover, including seeking professional guidance.

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.

 

Next: The director's role