Imagine a situation where you have been invited to become a director of a company, and are keen to accept the honour. You know all the other directors, you’ve researched the company and the wider industry, and are happy with what you’ve learned. Need you think twice before signing on the dotted line?
If you are considering accepting a directorship, especially if this is the first time, pause for a moment. Are you aware of the legal framework applicable to directors, and are you comfortable with taking on the responsibilities that this entails?
Here are some of the key points to be aware of:
(1) Directors are subject to duties imposed by UK law, and can be personally liable to the company in certain circumstances if those are breached. The duties are listed at the end of the article. Even non-executive directors, who may have little involvement in the day-to-day running of the company, are subject to these duties: part-time status and ignorance of certain areas of the business won’t be a defence.
(2) Directors are responsible for ensuring that the company complies with various company law regulatory and legal requirements, such as filing annual accounts and returns at Companies House.
(3) Directors, if they are also shareholders, need to be aware that they are wearing two different ’hats’. Shareholders are allowed to act and vote in their own self-interest. Directors, by contrast, must always consider their duties and act in the best interest of the business. It is important not to confuse the two roles – blurring the lines between them is a common problem in companies where the directors and shareholders are one and the same.
(4) Be aware of the risk of conflict of interest. A classic example is when a director of a company takes up a directorship within another company in a similar industry, or when a director wants to exploit an opportunity that the company has previously turned down. Do not make the mistake of assuming that you are free to do either of these things, otherwise you might find that you have breached your duties.
(5) Companies have to comply with a huge number of laws, e.g. health and safety and anti-bribery. Many of these laws provide that directors will be personally liable if they are responsible for the company’s failure to comply with the law.
(6) Personal liability will be costly for the director, not to mention damaging to his or her reputation. It is possible to obtain insurance against some of the personal liabilities that a director could incur. This is called directors’ and officers’ (or D&O) insurance. If you are thinking of becoming a company director, ask the company whether it has this insurance in place and find out what the policy covers.
(7) A director’s liability for breach of duty might not be limited solely to financial penalties. If a director is negligent or incompetent, he or she runs the risk of being disqualified from being a director for a period of time or, in the most serious cases, being held to have committed a criminal offence.
None of the above should deter a would-be director and indeed many people are directors without having any issues at all. However, as with any business decision, it is important to be informed before taking the plunge.
If you are in any doubt about what will be expected of you and whether you could fulfil your duties then seek professional advice. This will give you the reassurance that you understand your responsibilities and let you concentrate on making your directorship, should you decide to accept it, a success both professionally and financially.
Under the Companies Act 2006, every director has a duty to:
- Act within their powers
- Act in good faith so as to promote the success of the company for the benefit of its shareholders
- Exercise independent judgment
- Exercise reasonable skill and care and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties
- Declare the nature and extent of any interest in a proposed transaction or arrangement
The above is just an outline: there is not space in this article to explore the details of each of the above duties.