Director’s responsibilities

Do I need any special skills or qualifications to be a director?

There is no legal requirement for any qualifications except in certain specific businesses (eg. regulated investment companies).

Almost anyone can be a director, apart from the company’s auditor, people who have been disqualified from acting as a director, and undischarged bankrupts (who would need permission from the court).

Generally, a director is required to exercise some degree of both skill and diligence when performing his or her duties.

In practice, it makes sense for the board of directors to have the skills and experience needed to run the company effectively. In particular, they should ensure that they can meet their legal obligations - either through having the skills and experience themselves, or by taking appropriate advice.

What are my responsibilities to the shareholders?

Your primary responsibility is to act in the best interests of the company rather than individual shareholders. As far as the shareholders are concerned, you have ´fiduciary´ duties (you are seen as being in a position of trust - particularly in relation to advice given to them) and you must treat them fairly. For example, you must not act in the interests of a majority shareholder without considering the interests of minority shareholders.

Am I responsible to anyone other than the shareholders?

Yes. You must act in good faith, in the best interests of the company as a whole. For example, if the company faced a cash shortage, it might be inappropriate (and it could be unlawful) to declare a dividend even if the shareholders wanted you to.

As well as the shareholders, you must consider the interests of other ´stakeholders´ such as creditors and employees.

You also have a responsibility for ensuring that the company complies with all relevant legislation

Can I have private dealings with a company I am a director of?

Only if permitted by the company’s articles of association and having disclosed all material facts to the board so that the arrangements may be formally approved. You must not use your position to make private profits at the company’s expense. You must also declare any conflict of interest.

The company cannot loan monies to you.

Any substantial private deal with the company must be approved by the shareholders.

Do I need to read the company’s memorandum and articles of association or any other documents?

Yes. The company’s memorandum and articles of association set out the constitution of the company and its powers, which can include:

• Limitations on the ´objects´ of the company, such as requiring the company to pursue a particular type of business.

• Limitations on the powers directors have, such as borrowing money.

• Rules on the numbers of directors, how they are appointed, and how decisions are taken.

• Details of any decisions which must be agreed by shareholders.

It is therefore essential that you know what the memorandum and articles contain, so that you can ensure that you act within them.

As far as other documents are concerned, you will want to be aware of everything which can help you fulfil your role as a director effectively. Documents you should always see include:

• Annual report and accounts.

• Management accounts.

• Bank balances, cash books and reconciliations.

• Strategy documents.

• Key policy documents (such as health and safety).

• Minutes of board meetings.

• Information on key products, services, personnel and so on.

Does it matter if I don’t get to see management accounts and other information?

Yes. Without the right information, it will be difficult for you to fulfil your responsibilities and to protect yourself from claims. These include the requirement to exercise an acceptable degree of care in your actions as a director. Ignorance is not a defence to breach of directors´ duties.

In many companies, individual directors such as the finance director take primary responsibility for particular areas. Even so, every director would normally expect to see management accounts and any other important information regarding the overall position of the company.

Are there any special rules about my contract of employment?

Your contract of employment must be approved by the board of directors. If it is for more than five years, then it must also be approved by the shareholders.

Also, a copy of your contract must always be available for inspection by members.

What returns do we have to make to Companies House?

Each year, the company should be sent an annual return summarising all the information Companies House holds on the company. The annual return must be checked, amended if necessary, and returned to Companies House within 28 days of the date given on the form.

You are also required to file a copy of your annual report and accounts within ten months of your accounting year end (seven months for a ´plc´ public company).

Other filings which you must make with Companies House include:

• changes to the memorandum or articles, and some shareholder resolutions;

• changes to directors, company secretary or registered office;

• any change to your accounting reference date;

• certain changes to shareholdings or the company’s share structure;

• if you grant a mortgage or charge over an asset.

Many companies use a company secretarial service, or their professional advisers, to ensure that the correct documents are filed, on time. Failing to do so can lead to severe penalties for the company and its officers. You should be aware that it is a criminal offence not to file some of this information.

Apart from company law, do I have any other legal obligations?

Yes, there are circumstances in which you can be held personally responsible for business decisions which are effectively unlawful, for example under the Health & Safety at Work Act.

The board must ensure that the company complies with all legislation and regulations relevant to its business. You should ensure that at least one of the directors is familiar with each of the following areas of the law:

• Employment.

• Health & safety.

• Insurance obligations.

• Tax.

How can I protect myself from potential legal action?

You need to understand your role within the company and the law relevant to that area, and to take an active approach to fulfilling your responsibilities.

If you are not happy with the way the company is being run, you may wish to require a board meeting to discuss your concerns. Where you disagree with a decision, it is always a good idea to ensure that this is noted in the minutes of the meeting, together with your reasons.

If you are concerned that things are not as they should be, take legal advice personally.

You may also want to consider whether it is worth having directors and officers liability insurance. Although this cannot protect you from legal action, it can cover the costs of legal advice and any fines imposed.

Can I be held liable if I haven’t been officially appointed as a director?

Yes.

If you are a ´de facto´ director - ie. you act as a director even though you have not been officially appointed - you could be held liable. The same is true if you are a ´shadow´ director - ie. you exert influence through the directors.

Like anyone else, you could also be held liable for your acts as an individual: for example, for sex/race or disability discrimination.

Can I be held liable if I have resigned as a director?

If you continue to exert influence as a shadow director after your resignation, you can still be liable.

Also, resigning as a director does not allow you to walk away from problems. For example, if the company subsequently becomes insolvent, the insolvency practitioner (official receiver, administrator, etc) will look into the conduct of the directors over the previous three years.