Do you know your duties as a Director?

Do you run your own business?  Do you know your responsibilities?

If you have been running your business as a sole trader or a party in a partnership, the chances are that you your accountant has advised you to consider incorporating as a Limited Company.

You are not alone: for the first time ever, the number of companies on the register in the UK surpassed four million at the end of March 2018.

What’s in it for me?

Setting up as a company offers the entrepreneur various advantages, not least he can keep his personal assets and finances separate from the business itself.  Broadly speaking, there can be tax advantages, too[1], and the opportunity to claim back the cost of using your vehicle or your own house for the business.

But what happens next?  You’re a director of a company – so what?

We frequently receive enquiries from business clients, many of whom have incorporated their business in the past.  They continue to manage the new company on a day-to-day basis, but are not aware of their ongoing obligations as company directors.

Why is it important?

Ultimately, it is the company that may take action against a director in breach of his duties.

Your failure to comply with your duties could mean you are committing a criminal offence and/or make you personally liable for any resultant losses to the company – now or in the future.

We encounter many directors who do not think their duties are relevant to them.  Perhaps you are the sole director/shareholder of a company; or part of a family business with no history of dispute:

The company won’t take action against me, when I am the company!”  or “My brother wouldn’t go behind my back!

Maybe not.  But a company’s directors and shareholders can change over the course of time for any number of reasons – and this is often when a breach by a director will be identified: during the insolvency process, for example, or when a new investor or lender is considering the company’s viability.

An historic breach of directors’ duties could have seriously adverse consequences for an individual director, including fines, disqualification or imprisonment.   From a commercial perspective, such breaches can affect the likelihood that the company will attract future investors, purchasers, or third-party funding.

What should I know?

The first step to ensuring compliance is increasing your awareness.  As a director, you should at the very least know what your primary duties are and remain vigilant of them while you are a director.

The Companies Act 2006

The Companies Act 2006 sets out the legal duties, which are summarised below:

  1. A director must act within his powers

You must not, for example, enter into a contract worth £200,000 if its Articles of Association state that you may only enter into contracts under £100,000.

  1. A director must promote the success of the company

When making decisions, you must keep in mind such considerations as the interests of the company’s employees; and the company’s needs and its effect on the community and the environment.

  1. A director must exercise independent judgment

You must take an active role in making decisions, whilst not allowing yourself to be swayed by other members or other directors.

  1. A director must exercise reasonable care, skill and diligence

You must act as would a reasonably diligent person with the knowledge and experience that you possess.   This means that if you have specialist skills, a higher standard would be expected of you in that area (e.g. as an accountant).

  1. A director must avoid conflicts of interest

You must avoid situations in which you might be conflicted in your personal capacity and as a director.  This is relevant if, for example, a company might be considering a transaction with one of its directors.

  1. A director must not accept benefits from third parties

You must not accept any benefit that is likely to result in a conflict of interest with your company.

  1. A director must declare any interest in a proposed transaction or arrangement with the company

You must disclose any interest you have with the remaining board members.  In the case of a company with a sole director/shareholder, it is still important to do so.

At common law, a director must also ensure that a company’s regulatory duties are met, which includes submitting the relevant documents to Companies House within the prescribed timeframe (e.g. annual accounts and confirmation statements).

Help!  I think I’ve breached my duties as a director

We are here to help if you think you are in breach of your duties as a director.   In certain circumstances, transactions resulting from a director’s actions (or omissions) may be approved retrospectively.

It may simply be a matter of updating the Company Books so that they are compliant with legislative requirements.

Contact a member of our Commercial Services team who will be happy to assist.

General Company Commercial Advice

We can also offer advice on a range of business matters, including:

  • Setting up a business;
  • Business re-structuring;
  • Ongoing compliance;
  • Commercial agreements, such as Shareholders’ Agreements and Introducer Agreements; and
  • Buying and selling businesses/companies.

[1] Always seek specialist advice from your accountant.

For more information, please contact our Litigation department on 01460 279279.