Are you a fit director?

Are you a fit director?

19 Jul    Advice, Finance News, Legal

All directors have responsibilities under the Companies Act 2006, but many lose sight of what is required when they’re in the thick of running a business.

Worse still some don’t even realise what is expected of them, Charlotte Mills, a director and head of the corporate and commercial team at Jackson Lees examines.

A company director has many duties and wears many hats so can find themselves dealing with all manner of day-to-day issues. Despite this, a director must also ensure that the company complies with the law, files its accounts and annual confirmation statement at Companies House, as well as maintain its solvency.

Anyone attracted by the job title and status should think long and hard about taking on the role. Holding office as a director might sound prestigious but is a serious commitment. Failing to act in accordance with certain rules won’t just damage the company but can lead to personal liability or even criminal charges, meaning you have much to lose if you fail to take your duties seriously.

In addition to wider fiduciary duties (like acting honestly and in good faith) and regulatory responsibilities (like health and safety and environmental compliance), there are seven main duties that a director must adhere to under the Companies Act 2006, namely:

Act within powers

A director of a limited company must act in accordance with the company’s constitution, but many don’t know what it contains, let alone where to find it!

A company’s constitution, or ‘Articles of Association’, details the rules on how the business should be governed and operated. It is a statutory requirement that all registered companies have.

If you’re not familiar with yours, visit the Companies House website as there will be a copy there and it should be easily accessible against your company’s online file.

Promote the success of the company

The Act states that directors must have regard (among other matters) to the following:

  • The likely long-term consequences of any decision.
  • The interests of the company’s employees.
  • The need to foster the company’s business relationships with suppliers, customers and others.
  • The impact of the company’s operations on the community and the environment.
  • The desirability of the company maintaining a reputation for high standards of business conduct.
  • The need to act fairly between members of the company.

The courts do not expect directors to be guarantors of a company’s success. The statutory obligation is that directors act in the way they consider (not what a court may consider) would be most likely to promote the company’s success for the benefit of its members as a whole.

The courts recognise that directors are in control of an entrepreneurial venture and that a degree of commercial risk-taking is a necessary part of a business’s success. Further, it has long been accepted that directors are not liable for mere errors of judgment.

While a court may relieve directors from liability if they acted honestly and reasonably it will only do so if, in its opinion, they ought fairly to be excused. Prudent directors will therefore take every reasonable step to prevent liability arising.

Holding regular board and other management meetings and reviews, accompanied by clear minutes, are the best evidence of the steps directors took, and why.

Exercise independent judgment

A director must not let their powers as director be controlled by others. This doesn’t prevent directors from relying on advice from others as long as they exercise their own judgment as to whether or not to follow that advice.

Exercise reasonable care skills and diligence

A director must exercise their duties diligently, performing their role to a high standard. A director must perform to the best of their ability and accept the responsibilities and expectations associated with the role.

Avoid conflicts of interest

A director must not, without the consent of the company, place themselves in a position where there is a conflict or possible conflict of interest. Directors should always disclose any potential conflict.

This issue often arises in family-run businesses, and it is important directors do not lose sight of their obligations. I am aware of a case of three shareholders, an elderly woman who had inherited her husband’s share and his two brothers who didn’t involve her. The brothers were taking the business opportunities they received from that company and passing them onto another competitor company they had set up. This is a clear conflict of interest and is certainly not acting in the best interests of the company they own with their sister-in-law.

This duty also doesn’t stop on termination of the director’s appointment with respect to the exploitation of property, information, or an opportunity that they became aware of whilst holding office.

Not to accept benefits from third parties

A director must not accept benefits in connection with their role from people other than the company (or a person acting on behalf of the company).

For example, if you are about to enter talks to work alongside another company, you must be mindful not to take any inducements such as gifts or financial payments from the other party.

Again, this applies after a person ceases to be a director in relation to the things done or omitted to be done by them before the directorship ended.

Declare an interest in a proposed transaction or arrangement

Directors must declare to other directors the nature and extent of any interest (direct or indirect) in a proposed transaction or arrangement with the company, prior to the company entering any such transaction or arrangement.

An interest doesn’t necessarily mean a conflict but flagging it at the outset allows your fellow directors to make an informed decision and ensures you have complied with your duties.

Becoming a company director puts you in a position of responsibility and while there might seem like a lot to consider, this guidance represents good, honest business practice and should not be onerous.  The law is there to guide you.

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