Responsibilities of Directors

In the UK there is only a legal requirement for individuals wishing to be a director to hold any qualifications in a few narrow professions, such as an investment company. In most industries, almost anyone can be a director; directors can even be other limited companies. The list of people who cannot become a director include:

• Auditor of the Company;

• People disqualified from such a position by the Court;

• Undischarged bankrupts (Court’s permission is required).

• And any individual under 16 years of age.

A director has a duty to the Company he is serving rather than the shareholders; these duties are enshrined in the Companies Act 2006. If a director is unsure of his responsibilities it is critical that they take legal advice to ensure they are not breaching any of their duties. A basic outline of their duties are to:

• Promote the long term success of the Company;

• Declare any direct or indirect personal interest in any transactions;

• Avoid any conflicts of interests which may harm the Company;

• Not to accept benefits from third parties which may harm the Company’s interests;

• Always use independent judgement;

• And to act within the constraints laid out in the Company’s constitution.

It is the overall duty of the director to promote the long term success of the Company as a whole rather than the short term benefits for the shareholders. Other stakeholders have to be considered by the director such as employees of the Company and creditors owed money by the Company.

It is possible for a director to have private dealings with the Company to which he is a director of however some restrictions apply. A director may only have private dealings with his own Company if the Company’s Articles of Association permit and all information relevant to the transaction and the Director’s interest has been submitted to the board. The Companies Act 2006 has a provision which will catch any transaction that is valued at over £100,000 or 5% of the assets of a company. If the transaction falls within these criteria there is a separate procedure that will need to be followed.

If a director believes that there is any chance of a conflict of interest arising in any potential transaction of the Company it is advisable for them to disclose this to the board of directors. It is a criminal offence for a director not to disclose a conflict of interest so it would be advisable for any director who believes that there is a chance of a conflict of interest to declare it.

It is a general rule that service contracts to directors should be approved by the board. If the service contract is for a period of 2 years or longer then it will also have to be approved by the shareholders of the Company.

It is a further duty of the director to ensure that the Company files a record of the past years’ financial results at Companies House, this record is usually called an ‘annual return’. There are penalties for failing to file annual accounts at Companies House. Although this responsibility may be delegated to the Company Secretary, if there is someone fulfilling this role, ultimate responsibility still lies with the director.

It is imperative that before accepting their role as a director, the party has carefully examined the Articles of Association of the Company as this document will contain all the duties and restrictions which the director will have imposed on him. It should not just be assumed that every Company will have standard Articles of Association.

It is not only the Companies Act 2006 to which a director can be seen as breaching, a director may also be held personally responsible under for example, the Health & Safety at Work Act if he has failed to ensure workers’ safety in the workplace.

There are various penalties to which a director could be found to suffer, these include disqualification from being a company director for a determined period of time, becoming personally liable for the Company’s’ debts for example.

A director may still be seen as liable even after he has left his role with the Company if they still exert influence over the board. If the director has no lingering authority within the Company than he would not be liable for any problems arising after he has left the Company, however, resignation aside the director would still be liable for any issues which occurred whilst still holding a directorship in the Company.

This advice is provided by Jonathan Green of Darlingtons Solicitors, providers of high quality, cost effective commercial law advice for businesses of all types and sizes.