10 December 2019
Entrepreneurism is popular in the UK. There are over 2.5 million company directors, but no statistics are available on how many of these have received any training or guidance about their duties and responsibilities. ICAEW has published a guide for small private companies with more than one director.
How many of us have gone into business because we liked the idea of being our own boss? It is an appealing idea and one to be encouraged, but in fact running a business, especially as a limited company, brings many legal obligations, some of which emerge only when there is a problem or a crisis.
In general terms, the 2006 Companies Act requires directors to act diligently and in good faith. No special expertise is demanded but, where a director has specific experience or professional qualifications, they are expected to act accordingly. In all cases, a director should be familiar with the company’s affairs and financial position. There are seven duties listed in the Act:
- To act within the powers of the company as defined by its articles of association.
- To promote the success of the company for the benefits of its members as a whole.
- To exercise independent judgement.
- To exercise reasonable care, skill and judgement.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare interests in transactions or arrangements with the company.
Cooperation and delegation are the main themes. Directors have collective responsibility, acting as a board. They are allowed to delegate duties to individual directors, such as a Managing Director or Finance Director, or to managers and other employees, but this does not absolve them of their ultimate responsibility for the actions of the company.
An area in which a company’s external accountants or auditors are often involved, this relates to the maintenance of adequate accounting records, the preparation of annual accounts, the upkeep of the statutory registers, and filing accounts, annual returns, and other notifications at Companies House.
Transactions with directors
Directors should ensure that they have properly documented service contracts available for inspection. Normally, loans by a company to a director are not permitted but where exemptions allow, any such transaction has to be authorised by the shareholders and properly documented. This applies to transactions of a similar nature, such as a company providing guarantees or security for a loan exceeding £10,000.
Shareholder approval is also required for the acquisition or disposal of a substantial non-cash asset from or to a director or connected person.
If it all goes wrong
Directors are required to have sufficient knowledge of their companies’ financial affairs to be in a position to recognise the signs of failure. If it becomes clear that a company will not be able to settle its debts when they are due, it is the directors’ duty to take appropriate steps, for example seeking the advice of an insolvency practitioner. At this point, the directors’ responsibilities are not to the shareholders but to the creditors, for whom the directors must seek to minimise their losses. Creditors are to be treated as a whole; no preference should be given to any one creditor over the others. Failure to do this may amount to wrongful trading, which means that the protection of limited liability is lost and the directors may become personally liable for the company’s debts.
If the company goes into liquidation, the directors have a duty to cooperate with any consequent investigation.
Damage to wealth and reputation
As well as being held personally liable for the company’s debts, as in cases of wrongful trading, where a company enters into insolvent administration or liquidation, past transactions may be examined for evidence of fraudulent trading, meaning transactions carried out intentionally to defraud the creditors. In such cases, the directors may be required to make such contributions to the company’s assets as the Court deems appropriate.
Fines can be applied for failures to comply with the Companies Act, and are occasionally used for offenders that regularly miss filing deadlines.
In addition to the above, a person can be disqualified from acting as a director for a period of time determined by the Court. Some penalties will lead to the director acquiring a criminal record.
So running your own business, if not done diligently, can be costly both in terms of personal wealth and reputation.
More details can be found on the website of the Institute of Chartered Accountants in England and Wales. However, if you have any doubts as to your duties and responsibilities in your specific circumstances, do not hesitate to get in touch with me at email@example.com. I will be able to advise you or, if necessary, introduce you to a specialist lawyer.