The thought of becoming a company director is one which fills many individuals with excitement and self-fulfilment. The responsibility does indeed come with huge challenges and potential hurdles and setbacks along the way, but if navigated correctly, the rewards can be highly satisfactory for your business and for you as an individual.  However, running your own company or being a key decision maker could also be detrimental to your professional career, especially if you are not fully aware of your duties and/or neglect your duties.

The Message
The key message promoted by Insolvency Practitioners to business owners, company directors and decision makers cannot be more emphatic than the below statement.

Are you as a business owner or company director fully aware of your duties and responsibilities as a director?

Similarly, this question should be taken seriously by anyone thinking of becoming a director.

The overriding message portrayed is to not undertake a director role without thoughtful consideration, and to always familiarise yourself with your duties. You can ensure this by making sure you have access to all the information you need to assess and make proper decisions and, if you need to, seek advice from colleagues, professionals and experts where you need it.

A Common Misconception?
Whether you are a director of a large organisation or a newly formed small family run business, it is essential to be fully aware and compliant of your responsibilities as a company director. Failure to do so could mean that you are in serious breach of the law, and you risk running in to profound consequences which could affect both you and your company.

One of the major errors of judgement that can befall directors is that the duties relating to company directors would still apply even if you have not been officially appointed with Companies House. The general misconception that an official appointment hasn’t taken place will not exclude you from the consequences which may befall an official director, and thus, you face the same legal obligations that would be beset upon officially appointed directors.  Similarly, if you are an individual who gives directions or instructions to company directors, and those orders are carried out based on your directions or instructions, you would be deemed a shadow director or de facto director, enabling all duties to apply to yourself.

The Duties
So, what exactly are these duties which befall a director, shadow director or de facto director? Well, the Companies Act 2006 identifies seven fundamental statutory duties that must be complied with.

  • To act within powers.
  • To promote the success of the company.
  • To exercise reasonable care, skill and judgement.
  • To avoid conflicts of interest.
  • Not to accept benefits from third parties.
  • To declare an interest in a proposed transaction or arrangement.

In summary, you as a director must act in accordance with your company’s constitution and your actions should never favour any shareholder. They must always, benefit the company’s members as a whole and there should never be any internal or external pressure to vote in a certain way at a board meeting. Similarly, being incompetent or negligent in any way would be classified as being in breach of your duties.

One area of major concern for Insolvency Practitioners is that there have been many cases where a director has had an indirect or direct conflict of interest with the company. An example of this could be that the director or acting director has other shares in a competing business which ultimately would be deemed as totally unacceptable. Equally concerning, is the number of cases where directors are offered incentives from third parties. This includes bribes but may also include benefits from being a director, shareholder, employee or advisor to a competing company.

Finally, you must declare the nature and extent of any interest you have in a proposed transaction or arrangement to the board of directors whether or not they are directly or indirectly interested in it.

In addition to all of the above, there are also equitable and fiduciary duties owed by a director to the company including:

  • A duty of confidence.
  • A duty of good faith and loyalty.
  • A duty to act in the best interests of the company.

The Consequences –  A slap on the wrist, a hefty fine, criminal conviction or even a jail sentence.
Do you want to spend some time behind bars? I thought not. But this is exactly what could happen in the most serious of cases. By understanding the profound consequences that befall any breach, it should act as a warning beacon to any potential neglect towards general directors’ duties.  

The main concern for directors is the financial implications which they can be hit by. Again, there is a misconception that if you are in breach of duties and are operating on behalf of the company, then it wouldn’t necessarily affect you personally. This is far from the truth, and if you are found to have committed a breach of duty which costs the company, you could be personally liable to have a claim made against you.  To make this even worse, some breaches could even carry criminal sanctions – which explains the jail reference earlier.

Another important aspect to consider is that money cannot buy you out of every breach. Losing your ability to act as a company director could also be imposed – which could last as long as 15 years.

The clear message we are stressing is to be fully aware and compliant with your duties as a director, not to neglect them and to ensure you have access to all the information you need in order to assess and make proper decisions. Should you be in any doubt, seek professional advice and don’t allow yourself to fall foul of company breaches as the repercussions on you could be devastating.

Ahmed Ali

Marketing & Practice Development Executive 

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