Many of us in small business have signed up for being Company Directors.  It would be interesting to know how many of us found out our legal responsibilities before taking on the role.  I’m prepared to wager that it is a small percentage.

In practice this lack of knowledge is rarely a major problem, but it does crop up and our sense is that it lurks as an answered question in many Company Director’s minds.  Therefore we attempt to answer the question – ‘What are my responsibilities as Company Director?’.

The fundamental duties of Directors are set out in the Companies Act 2006 and are set out below:

1.  Promote the long-term success of the company
Top of the list is a responsibility to act in the interests of the company’s long term success.  This could be against the interest of the majority shareholder or the employees or of other directors.  The success of the company is measured by increase in value over the long term and therefore will be in the interests of the shareholders over the long term, but not necessarily the short term.

2.  Act according to the company’s constitution
All companies are governed by a constitution set out in the Memorandum and Articles of Association.  This is a set of rules that everyone in the company must play by.  So what this requirement means is to know the rules and abide by them.  In small business where the Directors and Shareholders are the same people there is little likelihood of dispute because rules were not followed but occasionally it comes up in transactions with tax consequences eg transfer of shares and HMRC may dispute transactions that are not backed up by the correct minutes etc.

The specifics of each company’s constitution will vary but there are not many that do not include the following:
  • Maintaining records of Directors, Shareholders, Members, Board Meeting Minutes, Resolutions
  • Maintaining statutory records at Companies House (submitting the annual Confirmation Statement and other ad hoc filings)
  • Keeping accurate accounting records
  • Paying Corporation Tax and other liabilities by given deadlines
  • Submitting accurate accounts to Companies House
  • Providing shareholders with Annual Accounts
3.  Exercise reasonable skill, care and diligence
This is not to say Directors must be expert in their duties and running the company, it simply means that they must take reasonable care to get it right.  For example Directors are not required to know Company Law or to accounting standards when compiling statutory accounts but they are expected to employ appropriately qualified people and provide some level of scrutiny of the work done.

4.  Make decisions independently
Obviously this is much more of a problem in the corporate world where constituents such as employees and shareholders may be lobbying for conflicting actions.  The idea here is that company directors should be impartial in evaluating what is in the long-term interests of the company.

5.  Avoid conflicts of interest, decline inducements from Third Parties and declare personal interest
Directors are required to avoid situations where their decision making is compromised by self-interest and specifically to decline offers of gifts or other benefits from Third Parties.  Finally they if they do find themselves with a personal interest in a proposed transaction they are required to declare that interest.

6.  Special responsibilities in the case of insolvency
If a company’s assets are smaller than its liabilities it is said to be insolvent.  In this situation special duties start to become important if Directors wish to avoid being personally responsible for debts.  This is a complex area and one where specialist advice should be taken but a basic concept to understand is that the decision to continue trading in this circumstance can mean Directors end up personally liable for others losses.  In other words, in this circumstance there are responsibilities to creditors (those to whom the company owes money) as well as the company itself.

As well as Company Law, Directors may have some personal responsibilities for business decisions that are illegal – for example under the Health and Safety at Work Act.   Whilst these are too varied to go into in effect it is important that Company Directors comply with the following areas of legislation:
  • Employment
  • Health and Safety
  • Insurance
  • Tax