Duties of UK Directors

Introduction

In the UK, company directors are quite separate from the shareholders of their companies and there is no legal requirement for directors to be shareholders. Directors are responsible for the management of their companies. But they act for the shareholders and must consider the shareholder’s interests in everything they do. They also have responsibilities to their company’s employees and creditors, and to the State.

Directors have a wide range of powers, but face serious penalties if they abuse them. Consequently, the office of director should not be accepted lightly.

A company can take out directors’ and officers’ liability insurance to pay for the legal expenses of directors being sued for negligence or breach of duty. Such insurance will not protect against actions for dishonesty, criminal acts or against actions in the case of the company failing. Companies can also indemnify their directors against non-criminal liabilities to third parties, but are subject to clawback if the director loses the case. Also, such indemnities will not cover fines or penalties imposed by a regulator or government agency.

The law is designed to penalise directors who act irresponsibly or incompetently, not those who act honestly and conscientiously. However directors can be jointly and severally liable for the consequences if they act collectively in breach of their responsibilities.

This News Flash summarises the main duties and responsibilities of directors of non-listed companies in the UK and covers:

Appointment, resignation and removal
Common Law duties
Statutory Duties
Duties towards employees
Duties towards creditors
Other legal duties

Appointment, resignation and removal

A private company must have at least one director; a public limited company at least two. A company’s constitution (the Articles of Association) can specify higher minimum numbers and a maximum. Directors can be “executive” (i.e. take part in the day-to-day running of the company) or “non-executive” (i.e. do not take part in day-to-day management). Even though non-executive directors do not have an executive role, they carry the same legal responsibilities as the executive directors.

The Board can appoint a director and the appointment confirmed by the shareholders. When a director is appointed, Companies House must be notified using the standard form, and their details, including home address, will be on public record. In very restricted circumstances it may be possible to keep the home address off this record.

Directors can usually resign at any time, but can only be removed by the shareholders.

Under UK Law, even if you are not a director but the other directors are ‘accustomed to act’ under your instructions, you could be classed as a “Shadow Director”. Shadow directors have the same legal responsibilities and are subject to the same penalties as other directors.

Under UK insolvency legislation a director (including a shadow director) can be disqualified from being a director for between two and fifteen years if a Court forms the view that a director’s conduct falls below that expected (following a report from the liquidator).

Common Law Duties

Under English Common Law the position of a Director is similar to that of a trustee or agent. Directors must act in good faith in the best interests of the company as a whole. A company is a separate legal entity from its directors, shareholders and employees and the best interests of the company are not always the same as those of the current shareholders (for example the payment of a dividend to shareholders that could cause cash flow problems to the company would not be in the best interests of the company). This is the case even if a director controls the company or is acting as nominee of the controlling shareholder.

Directors must not use their position to make undisclosed personal profits at the company’s expense. Any such profits made arising from being a director could be held by a Court to belong to the company. Also any conflicts of interest (for example because of interests in another company with which your company is planning to do business) must be declared and no part should be played in negotiating or voting on the deal. Disclosure of such transactions is required in the annual accounts,

The Courts have established that a director must exercise due skill and care when acting as such. Although this is a subjective matter, a director cannot accept appointment and then do nothing. Directors do not have to attend all Directors’ Meetings, nor give continuous attention to the company’s affairs. However the Courts will look at the director’s diligence in dealing with the company’s affairs and the skills a director has, when deciding whether they have carried out their duties properly. Directors can be sued by the company for any breach of duty.

Directors also have to remain impartial as between different groups of shareholders of the company and ensure that their actions are not oppressive to minority shareholders.

Statutory Duties

Directors are personally responsible for ensuring the company complies with company law. In particular, company law covers the following points:

Proper accounting records must be maintained as defined by the Companies Act
Accounts must be prepared for each year to a date that is registered at Companies House. The accounts must be true and fair and be properly prepared in accordance with UK accounting standards and the requirements of the Companies Act. Each shareholder is entitled to a copy of the accounts. There are a number of disclosure exemptions available for smaller companies and only larger groups have to prepare group accounts
Accounts have to be filed at Companies House within a specified period otherwise automatic penalties will arise. Currently private companies have to file within 10 months of the year-end; public companies within 7 months. Small companies can currently file abbreviated accounts that do not contain a Directors Report or a Profit and Loss Account.
Only very small companies are exempt from audit.
It is a criminal offence for directors to knowingly mislead or fail to provide or withhold relevant information from the auditors (who must be independent from the company).
Annual General Meetings of the shareholders must be held, although small companies can elect to dispense with this. Certain business of the Company must be carried out at properly convened General Meetings and the necessary procedures (including the passing of resolutions) must be carried out in the correct manner.
Maintaining registers of shareholders, directors, directors’ interests and charges and making required returns including an Annual Return to Companies House.
A general prohibition on making or guaranteeing loans to directors, with limited exemptions. There are further restrictions on making loans or providing other credit to directors of public companies and their connected persons
Keeping minutes of Directors’ Meetings and General Meetings

There are criminal and civil penalties for breaches in Company Law.

The above requirements are complex and professional advice is likely to be required to ensure compliance.

Duties towards employees

Directors have a statutory obligation to consider the interests of employees. The company must comply with inter alia employment law and health and safety regulations. Directors can be personally sued for unfair dismissal, racial or sexual discrimination, or unfair work practices. They can also be sued for dangerous practices started or continued with their consent, or for illness or accidents attributable to their negligence.

Duties towards creditors

While a company is solvent its directors do not have any particular duties towards creditors. However, if the company gets into financial difficulties the directors could become personally liable for fraudulent trading or wrongful trading immediately before the company went into liquidation.

Fraudulent trading would occur when a company intentionally defrauds its creditors. However, few actions are successful because dishonest intent must be proved.

Directors will be guilty of wrongful trading if they allow the company to carry on trading and incur debts when they knew, or should have known, that there was no reasonable prospect of the company being able to settle those debts. The fact that the company is loss-making does not of itself mean that it is trading wrongfully, but if there is no reasonable prospect that it will move into profit and doubts exist about whether its assets will cover its liabilities or whether it can pay its debts as they fall due, it is probably trading wrongfully. The value placed on the assets in these circumstances is critical since their value in a forced sale may be much lower than their value in the company’s books (which are based on the company remaining a going concern). Similarly, in these circumstances, the company’s debts to be taken into account include the liquidation costs, and in a liquidation these costs rank ahead of most other debts (including the bank).

As part of a liquidation, the liquidator has to report to the Authorities on the conduct of the company’s directors and, as stated above, this could lead to a disqualification from being able to act as a company director for between 2 and 15 years. The liquidator’s report takes account of the company’s compliance with the relevant statutory and other regulations and each director’s performance. Not being involved in the day-to-day operations of the company does not excuse a director from ensuring the company fulfils its obligations. The Courts take account of a director’s experience and qualifications in reaching their decision whether to disqualify.

Consulting with an insolvency practitioner as soon as any going concern issues become apparent can mitigate the above risks. In addition, directors should ensure the situation is being constantly monitored and that all decisions are properly minuted.

Other legal duties

Other legal duties include ensuring that the correct amounts of tax, VAT and National Insurance are paid on time and ensuring compliance with other legislation such as data protection, consumer credit and taking account of physical disabilities.

The above information is general in nature and is subject to change. It is provided without acceptance by Bond Partners LLP of any responsibility whatsoever, and any use you wish to make of it is, therefore, at your own risk