Directors’ Duties & Responsibilities
Written by: John A Waller Director Updated: December 16th,2021.
What are the duties and responsibilities of a Director?
- Ensuring the success of the company;
- A duty to the company;
- To manage in a fit and proper manner. Moreover,;
- Exercise independent judgement;
- Act within powers;
- Avoid a breach of duty;
- Evade conflicts;
- Avoid directors breach of duties;
- Act in good faith;
- Exercise genuine business judgement;
- Protect company assets;
- Knowledge skills of the company;
- All officers understand the duty of directors;
- Act by companies acts;
- Ensure the company’s health, safety, and statutory duty;
- Must act honestly and exercise reasonable care;
- Understand the consequences of breach.
They have responsibilities, also to the company’s business, creditors and employees.
Above all, directors have broad powers and the freedom to manage a company. However, laws apply to check directors abusing power.
Additionally, directors must ensure the liquidity of the business is maintained. For a further understanding of liquidity, please read liquidity definition meaning.
The UK government maintains webinars to assist new directors.
As a director of a limited company, you are required to carry out duties and obligations in accordance with the Companies Act 2006. Directors who fail to adhere to obligations risk prosecution and potentially be struck off as directors for many years.
Appointments – Directors
Every limited company, however, must have a company director. At least one then needs to be an actual person.
- Initial director(s). The shareholders appoint them when forming the company;
- Future appointments comply with rules set out in the articles of association;
- Executive and non-executive directors can be appointed;
- People not appointed should take care not to act as a shadow or ‘de facto’ director;
- Former directors barred from acting along with bankrupts are therefore not able to hold office;
- To act as a Director, you advise companies house of your appointment;
- Who was appointed, and when?
- If anyone has resigned and when;
- Any details changed, and when.
Directors’ Duties and Responsibilities – Exercising directors’ powers.
Duties and responsibilities of directors must have no limitations in their role.
- Exercise care skill and diligence;
- Directors authority outlined in articles of association;
- Maintain independent judgement;
- Not to trade while insolvent.
They therefore must act in a way that promotes the success of the company and benefits the shareholders. A director must consider several statutory factors, including the consequences of decisions and the interests of shareholders and employees.
- You must give equal rights and consideration to all shareholders;
- As a director, do not set your position to benefit yourself at the company’s expense;
- Legally declare any conflict of interest;
- The shareholders must approve any deals between the company and you.
Responsibilities under company law.
Directors. They are therefore responsible for ensuring that the company complies with UK company law. However, failure to so may affect you personally.
- Statutory returns require filing with Companies House, on time;
- Ensure accounts are filed with Companies House;
- Provide company details on business stationery and elsewhere;
- Treat all creditors fairly, and not to prefer one over another;
- Not to benefit yourself over the creditors of the company.
- When furlough ends, I can’t pay my staff.
The Companies Act 2006
The Companies Act of 2006. An act of parliament, the source of UK company law. The 2009 Corporation Tax Act updated it.
The critical points of the act are:
- All aspects of the Companies Act 1985 were overhauled and updated;
- For public and private companies, an additional provision added;
- Existing common law principles codified along with directors’ duties;
- EEC Transparency Obligations and takeover directives added;
- Company law regime for the entire UK became unified;
- Great Britain & Northern Ireland split in dealing with company law.
Directors Duty – Potential penalties.
Exercise your responsibilities carefully as a director. Penalties for failure to do so can, however, be severe.
- You may personally be liable for losses of the company;
- Directors can be responsible if you act in breach of yours. Responsibilities, collectively and jointly;
- You may face disqualification from office when acting as a director;
- The Worst case scenario, you could receive a criminal conviction.
Please read Why do directors delay taking insolvency advice?
Responsibility for Directors in the UK during a liquidation
- As a director, you should therefore ensure the company ceases to trade. Once determined, the company is insolvent.
- Ensure care not to raise further sales invoices, pay staff, deliver finished goods, allow creditors to collect unpaid supplies or request any additional finance for the company. Any director, therefore, is not in the interests of company creditors and may expose you to allegations of wrongful trading, as per Section 214 of the Insolvency Act 1986.
- Once the ltd company has ceased trading, if the liquidation is voluntary, directors must call a meeting of shareholders, so they can vote on ‘winding up the company’. 75% of shareholders, therefore, must vote to pass the special resolution, after which the company must notify Companies House.
- An advert advertises the company’s intentions in the Gazette. Once resolution passed to wind up the company, an advert in the Gazette was placed within 14 days. Therefore, notifying any potential creditors as to the company’s intentions.
- As a director, you must prepare a statement of affairs. Perhaps the director’s final duty is to prepare the Statement of Affairs.
This document details the company’s current financial situation and includes current asset valuations, a most recent balance sheet, details of employees, creditors’ balances, including all debts owed of debts.
- Upon agreement, a duly authorised licensed insolvency practitioner may appoint. Therefore, appointing a licensed insolvency practitioner (Liquidator) is a legal requirement.
- You have to cooperate with the Liquidator while they are in office.
- Directors are then required to ensure safe delivery of company books and records, both in written and digital format, if so held. Refusal to do so may compel the Liquidator to ask the court to force you into doing so and seize records.
- The Liquidator has a legal mandate to ensure they investigate the behaviour of directors before the liquidation date. (For further information, please read ‘Duties of an Insolvency Practitioner‘)
- If wrongful trading is identified, the directors face a disqualification order, preventing them from serving as a director for up to potentially 15 years.
- Fraudulent trading may be subject to penalties, fines and a prison sentence.
- Yours and any other director’s authority cease once a liquidator is appointed.
- The Liquidator must interview you regarding the previous management of the company.
Convening the deemed consent procedure.
Now the director (convener) asks the IP to convene the ‘Deemed Consent Procedure’. Allows the consent of creditors over various matters, including the appointment of the Liquidator.
Unless more than 10% of the creditors oppose, then deemed consent to move forward.
Directors’ Duty – Directors Loan Account
All overdrawn directors’ loan accounts within the company are a debtor of the company when the company is in insolvency. As with any other debtor, they must therefore repay the company.
Often directors’ loans may have been written off in the company’s accounts. The liquidator may however write them back for collection. Potentially, this may cause insolvency issues, therefore for directors personally in the long run.
Directors’ Duty – Can a Director be Personally Liable for Company Debts?
Yes, directors liabilities may include if you:
- Dispose assets of your insolvent company for less than their current market value;
- Have signed a personal guarantee;
- Raise funds to repay creditors via fraudulent means;
- Pay yourself more than what you have declared on PAYE, create an overdrawn director’s loan account;
- Continue to trade knowing your business is insolvent;
- Sell the assets of an insolvent company for less than their market value;
- If the above does not apply to you, your liability for any of the company’s debts is limited to the money you invested in the business. If your business remains insolvent and enters into an insolvency procedure, the creditors will therefore only recover money owed via the business’s bank accounts and the sale of its assets.
For further reading on director’s liability, please view ‘limited liability meaning.
Directors’ Duty – Pitfalls as a Director.
- Regularly check the finances of the company;
- Losses require careful management if the company faces financial difficulties;
- Maintain minutes of directors’ meetings for future reference;
- Ensure monthly management accounts are produced, helping track the solvency of the company;
- Keep in mind your duties as a director;
- Avoid personal guarantees for the company’s debts, where possible;
- Taking out directors’ and officers’ liability insurance;
- Ensure verbal advice is given equally in writing;
- Avoid a compulsory liquidation and winding-up petition;
- Understand retention of title clauses with suppliers.
The Institute of Directors.
About the Institute of Directors.
The IoD, founded in 1903 and awarded a Royal Charter in 1906 to support, represent and set standards for business leaders nationwide in the UK. Their objective is to ensure that the views of business leaders are heard by the UK government when reviewing policy, legislation or exploring the opinions of the UK business community.
The IoD comprises over 30,000 entrepreneurs, CEOs, directors and decision-makers from every sector and region in the UK.
Free advice from approachable team of advisors.