Responsibilities of the Directors
An individual’s involvement with a company may be as employee, shareholder or a director. In many cases involving personal service companies it can be any combination of these three positions.
When you are formally appointed as a company director you are subject to statutory responsibilities. In addition individuals who act in the same capacity as directors, even though they are not formally appointed as directors, may be deemed to be “shadow directors”. Shadow directors are also subject to the same statutory responsibilities as formally appointed directors
Appointment of a director
The first directors of a company are appointed on incorporation. Thereafter directors can be appointed at any time by completing the relevant form and submitting it to Companies House. The form provides basic information about yourself and confirms your consent to becoming a director of the respective company.
Resignation of a director
Resignation must be notified to Companies House using the relevant form. Resigning as a director does not absolve you of responsibilities during the time you acted as a director. Even after formal resignation your actions may cause you to remain a shadow director and you will be subject to continuing responsibilities.
Minimum number of directors
Typically the minimum number of directors is one but it’s worth checking the company’s Articles of Association as these may require more than one especially if the company was incorporated many years ago.
Powers of a director
The directors are responsible for the management of the company and they may exercise all the powers of the company in performing this responsibility. These powers and any constraints are set out in the Articles and the Companies Act 2006.
Where there is more than one director (referred to as a Board of Directors) the directors must act collectively to bind the company. However most Articles entitle a Board to delegate powers to an individual director as considered appropriate.
In practice individual directors will normally carry out many of the company’s activities.
Whilst the directors have all the powers of the company they also have responsibilities or duties. These can be considered as primary duties and statutory duties.
A director is primarily responsible for determining the objectives and policies of the company, and then monitoring progress, handling the day to day administration or management and accounting for the activities of the company to the relevant interested parties, e.g. the shareholders.
In addition to the primary duties directors are also subject to statutory duties and also personally responsible for ensuring the Company complies with any statutory controls that apply to it. (Note, the company is a separate legal entity and also subject to its own statutory controls.)
There are seven general duties of a director:
- to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred
- to promote the success of the company for the benefit of its members
- to exercise independent judgement
- to exercise reasonable care, skill and diligence
- to avoid conflicts of interest
- not to accept benefits from third parties
- to declare an interest on a proposed transaction or agreement
These statutory duties are not the whole story because in addition a director will be subject to a wide range of regulation and legislation including the Insolvency Act 1986, the Company Directors’ Disqualification Act 1986, the Health and Safety at Work etc Act 1974 and the Corporate Manslaughter and Corporate Homicide Act 2007.
The directors are also responsible for ensuring the company complies with all regulations and laws that apply directly to it, including tax and employment laws of course.
Directors may be personally liable to penalties if the company fails to carry out its duties.
One of the main statutory responsibilities falling on a director is the preparation of the accounts. The directors must ensure that the company maintains full and accurate accounting records and are responsible for the preparation of accounts and their presentation to the shareholders and Companies House.
Company Directors’ Disqualification Act 1986
A person may be disqualified from acting as a director. There are three main reasons for disqualification:
- the director has been guilty of three or more defaults in complying with companies’ legislation regarding the filing of documents with the Registrar of Companies during the preceding five years;
- they were a director of a company that has become insolvent and their conduct as a director makes them unfit to be concerned in the management of a company
- the director is found guilty of wrongful or fraudulent trading (see below)
Insolvency Act 1986: Wrongful Trading
If a company has gone into insolvent liquidation and before that liquidation took place the director knew, or ought to have known, that there was no reasonable prospect that the company could avoid the liquidation, then a court may declare that the director makes a personal contribution towards the debts of the company. Wrongful trading is one of the reasons a director may be disqualified from acting as a director.
Insolvency Act 1986: Fraudulent Trading
The requirement for the director to make a personal contribution also exists where the director was knowingly a party to the carrying on of the company’s business with the intent to defraud the creditors. Fraudulent trading is one of the reasons a director may be disqualified from acting as a director.
Where a company secretary has been appointed they are responsible for various statutory administrative matters, mainly associated with compliance with the Companies Act 2006, procedural matters and filing documents at Companies House.
A private company need not appoint a secretary and if one does not exist the company secretary’s responsibilities become responsibilities of the directors.
This document is only a summary of the key responsibilities of a director and should not be understood to include all legal, ethical, social or commercial issues that may affect you when accepting appointment as a director. If you are unsure about the scope of what your responsibilities will be as a director you should discuss becoming a director with us or an alternative professional advisor before accepting the appointment.