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A Matter of Duties - Company Directors

In recent months there has been increased focus on director disqualifications which are on the rise according to Insolvency Service figures. While many disqualifications arise out of insolvency events, directors can be disqualified for other breaches of duties as well. 

Becoming a company director is simple but it comes with a range of duties and with some risk. Director’s duties are a serious matter so it is important that directors know them and act accordingly. Failure to do so can lead to disqualification for up to 15 years as well as personal liability to the company.

A Director has a variety of duties both at common law and from provisions in the Companies Act 2006 which are as follows:

  •   to act within powers
  •   to promote the success of the company
  •   to avoid conflicts of interest
  •   to exercise independent judgment
  •   to exercise reasonable care, skill and diligence
  •   not to accept benefits from a third party
  •   to declare an interest in a proposed transaction or arrangement
  •   to consider or act in the interests of creditors (particularly where insolvency might occur)
  •   to maintain confidentiality

It is not within the scope of this article to set out the detail of what each of these mean; however, the following are some of the routine things a director should do in complying with some of these duties.

Maintain proper accounting records

It is surprising how often directors are disqualified for failing to keep proper accounting records, particularly given there is no shortage of bookkeepers and accountants who can help. Good management accounts will help a director understand the financial position of the company on a day to day basis, meaning less risk of running into insolvency. 

Understanding the Articles of Association of the company

The articles are essentially the rules under which a company is run. There are model articles set out that cover every company but the articles may be modified to suit the company’s needs. If a director does not know what the rules are for running the company then it is very difficult for them to know whether they are acting within powers when making decisions.

Understanding the accounts

Sadly, it is not enough to leave the finances to the accountant. The accountant will provide advice but it is ultimately the director’s responsibility to understand the accounts and the financial position of the company. This can be particularly important if financial difficulty strikes.  An understanding of the accounts coupled with regular monitoring of the company’s financial performance will help minimise the risk of breaches such as wrongful trading or payments of illegal dividends, which can lead to personal liability for directors. It can also help identify trouble early and allow directors to seek professional advice. 

Keep detailed board minutes

A large number of companies in the SME market are owner managed, often by members of the same family so the idea of board meetings might seem unnecessary. However, the minutes from meetings act as a record of decisions and importantly, what matters the directors took into consideration when making those decisions. For example, if in entering a transaction there was an allegation that a director failed to declare an interest, the board minutes could provide the director with an effective defence if they had declared it. Any substantial changes to the structure, organisation or running of the company or its board, or significant transactions should be dealt with at a board meeting and recorded in the minutes.

Filing documents at Companies House on time

Filings can in most cases be submitted online, yet this is often overlooked. Directors must file a Confirmation Statement (replaces the old Annual Return) as well as the annual accounts each year by a specified date. Other documents that must be filed from time to time include appointments and terminations of directors, certain resolutions, amended Articles of Association, and changes in share capital.

Maintaining the register

Companies are required to maintain a register including a register of directors, register of members (another name for shareholders), and a register of Persons of Significant Control (PSC register). This is generally held at the registered office of the company.  Sometimes companies will have a solicitor or accountant provide a company secretarial service to maintain those registers and act as a registered office. Regardless, it remains the responsibility of the directors to provide the required information to be entered on the registers.

The above is not an exhaustive list and does not cover all the circumstances where a director might be in breach of his or her duties. A director should always consider their duties in making any decisions. Where in doubt, seek legal or other professional advice.

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

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