Advice to Company Directors

Who is a Director?

A Director is any person who has control over or who holds responsibility for the direction of a companys business. A Director can be a person officially appointed as a Director or a person who acts as a Director.

A person who is officially appointed as a Director will be registered as a Director at Companies House. Private companies need only have one Director, but in practice most have at least two. Companies must maintain a Register of Directors and notify the Registrar of Companies at Companies House of any changes within 14 days. The relevant forms are Form 288a (appointment), Form 288b (resignation) and Form 288c (change of particulars).

A person who, whilst not being officially appointed as a Director, nonetheless acts as though they are a Director is termed a "shadow director". A "shadow director" is defined as "a person in accordance with whose directions or instructions the Directors of a company are accustomed to act".

A Director who is not an employee of a company is termed a non-executive Director. If a Director is also an employee of a company then they will be an executive Director. The Companies Act legislation makes no distinction between executive and non-executive Directors. Non-executive Directors are Directors for all purposes of the legislation, and bear all of the relevant responsibilities.

Core Duties of Directors

The Companies Act 2006 has provided a new statutory statement of Directors' duties and brings together duties which, until the legislation was introduced, were only enshrined in case law.

Directors now have 7 core statutory duties these are as follows:-

1. To act in accordance with the company's constitution and only exercise powers for the purpose for which they were conferred.
2. To act in a way which they consider is most likely to promote the success of the company for the benefit of its shareholders as a whole. Here Directors must show that they have considered long-term and wider factors that is employees, customers, suppliers and the impact of the companys operations on the community and the environment, the companys reputation for high standards of business conduct and the need for fairness between shareholders. This has been termed "enlightened shareholder value", and it has been argued that the requirement to consider these factors will make decision-making more burdensome.
3. To exercise independent judgment.
4. To exercise reasonable care, skill and diligence.
5. To avoid conflicts of interest.
6. Not to accept benefits from third parties.
7. To declare any interest in a proposed or existing transaction with the company.

As a consequence of the legislation, the fiduciary duty to act in good faith and in the best interests of the company has, in effect, been replaced by a duty to act in the way which the Directors consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. However, it has been made clear that the new duties are fundamentally a codification of the former common law rules and equitable principles, and that the corresponding common law rules and equitable principles remain relevant in interpreting and applying the statutory duties.

In addition, Directors need to declare their interests (including those of any family member) in any transaction for the purposes of Section 317 of the Companies Act 1985 and any relevant provision of the company's articles of association. Whether or not the relevant Director can count towards the quorum for a meeting to approve such a transaction, or vote on any particular resolution to approve it, will depend on the companys articles of association. The Companies Act 2006 has made a number of changes to the rules on disclosure of Directors interests with effect from 01 October 2008. Section 177 relates to Directors declaring their interests in transactions or arrangements which are proposed but which have not been entered into by the company. The declaration must be both of the nature and extent of the Directors direct or indirect interest, and the declaration must be made before the company enters into the transaction or arrangement.

Additional Duties of Directors

Directors also have wide-ranging additional duties. For example, directors should not:-

• Allow a company in which they hold office to trade when the company is insolvent unless they are able to demonstrate that there is a strong prospect that the company will avoid insolvent liquidation. A company becomes insolvent when it is unable to pay its creditors as and when they fall due for payment, and or or when the value of its assets does not cover its liabilities. Allowing a company to trade whilst it is insolvent could result in prosecution, being banned from holding a directorship under the Company Directors Disqualification Act 1986 for a period of between ' and 15 years, and being made personally liable to contribute to the assets of the company for the purposes of satisfying creditors.
• Issue cheques or incur further credit when they know there is little or no prospect of payment.
• Take customer deposits when they know that the company cannot fulfil the order.
• Make the decision to pay certain creditors in preference to others.

In a competitive and challenging marketplace it is understandable to concentrate on increasing turnover and profitability. However, focus should also be given to ensuring compliance with legal requirements for if, notwithstanding such efforts, a company does proceed into liquidation, then a liquidator can take a number of actions against Directors, including in respect of:-

Wrongful Trading Section 214 of the Insolvency Act 1986

Wrongful trading is where a Director allows a company to continue to trade when they knew or ought to have known that the company was insolvent and had no prospect of avoiding insolvent liquidation.

Fraudulent Trading Section 213 of the Insolvency Act 1986

Fraudulent trading is where a Director allows a company to continue to carry on business with the intention of defrauding the companys creditors.

Honest Directors should not find themselves guilty of fraudulent trading. However, if found guilty of fraudulent trading then, in addition to the penalties previously described, a Director may face a limitless fine and or or imprisonment for up to 7 years.

Seek Expert Advice

Should a Director be uncertain in respect of any material matter which is not within their general knowledge, skill and experience, or should they have any concerns in respect of the company in which they hold office, then they should not delay in seeking professional advice from our Business Services Team.

If you're looking to build your business, or have been approached to sell your company, then give us a call on 01908 660966 or 01604 828282. Alternatively you can fill out our online contact form. Our dedicated Business Services team are always on hand to find you the best deal!