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  • Gary Smith
  • January 10, 2020
  • 5 min read

5 Ways to Minimise Risk as a Company Director

If you are looking at limited company formation for the first time, our Company Formation FAQs should help get you up to speed on what’s involved. As a follow-on to that, if you do decide to form a company, you also need to know what’s expected of you as a director. This guide is designed to help you understand the responsibilities of a company director and the practical steps you need to take to stay within the rules.

I’m the only shareholder. Do I still need to know about director responsibilities?

The duties of directors are set out in the Companies Act 2006, and we’ll look in more detail at the most important ones below. As a quick snapshot though, the obligations fall into two broad categories:

Administrative responsibilities: notably, rules to ensure you file the right information at the right time with Companies House, including your limited company tax return.

Conduct-related responsibilities: these are mostly concerned with preventing directors straying from the company’s own rulebook and from pursuing courses of action that are likely to be damaging to the company or its members.

If the company has more than one shareholder, it’s easy to see why this latter category of conduct-related responsibilities might be important. But what if you’re a sole trader or contractor who wants to incorporate? If you’re the only stakeholder and you want to run the company into the ground, surely it’s nobody’s business but yours?

In short, all directors, including 100% of shareholders need to abide by the general duties under the Companies Act 2006. Part of the reasoning behind this is to protect the position of the company’s creditors. In the event of company insolvency, the liquidator or administrator can pursue a claim against a director if (s)he has breached a duty to the company and that breach has caused or contributed to the insolvency.

What are the penalties for non-compliance?

It is the company itself that can take legal action against a director in the event of a breach of duty. In the event of an insolvency situation, the decision to take action can be taken by the liquidator.

Potential penalties include an injunction and/or compensation. Some breaches (e.g. failure to declare and interest and instances of dishonesty) can also give rise to criminal fines and possible disqualification as a director.

What are my general duties as a director?

As set out under the Act, key duties are as follows:

1. Act within powers

A director must always act in accordance with the company’s constitution and only exercise powers for the purposes for which they were granted.

A company’s constitution includes its articles of association – which sets out how the company is run, governed and owned – along with resolutions passed by company members.

Advice for compliance

Ensure your constitution reflects how you actually want your company to be governed. Among other things, the articles of association set out directors’ powers and responsibilities and describe how key decisions are reached. There is a model articles form available from Companies House. But rather than automatically adopting this in its entirety, make sure it is amended where necessary to reflect how your company will actually be run. Consult with your limited company formation advisors for help with this.

Always check the constitution before making big decisions. Let’s say you want to open a financially significant credit line with a supplier. Make sure you are clear on which part of your company’s constitution gives you the power to do this. Also, check for any restrictions or provisos that apply to this power. Do you need to notify or seek approval from shareholders, for instance?

Document your compliance. N.B. This tip applies to ALL directors’ responsibilities. For a significant action, make a written record explaining the reasons behind it and the specific powers you are exercising. Also, retain all evidence showing you have abided by any relevant restrictions (approved board meeting minutes and copies of communications, for instance).

2. Promote the success of the company

A director must act in a way that they consider, in good faith, would most likely to promote the success of the company for the benefit of its members as a whole.

While your primary duty here is to the company’s shareholders, the legislation also gives a non-exhaustive list of other parties and factors a director must consider. These include employees, customers, suppliers, community and environment, the company’s reputation and the long term impact of decisions.

Advice for compliance

Factor this duty into your decision-making process. Let’s say you intend to make a significant purchase. Always ensure that you can justify the course of action in the context of promoting the company’s success. This involves asking two key questions:

  • What goal or benefit is the company attempting to achieve?
  • Why is this particular course of action the optimum one for achieving this benefit?

3. Exercise independent judgment

You must act in the best interests of the company as a whole, and not merely one shareholder or a particular group of stakeholders.

Advice for compliance

Don’t follow advice blindly. Let’s say an IT consultancy has provided you with a buying recommendation for a major tech investment, or a tax advisor had provided recommendations for restructuring or issuing of dividends. Rather than automatically following the recommendation, you should always consider it in the context of what’s in the best interests of the company as a whole.

4. Exercise reasonable skill, care and diligence

You are required to demonstrate reasonable care, skill and diligence in exercising your duties as a director. For this, you are held to both an objective and a subjective standard of care. Here’s what this means:

Objective standard: you are expected to have a basic level of competence; i.e. you should demonstrate the knowledge and skill that would reasonably be expected of anyone carrying out the role of director.

Subjective standard: a director with special skills or knowledge are expected to bring these attributes to bear in the course of the role. If your experience is in property development and investment for instance, and you were making property investment decisions on behalf of the company, your decisions would be judged against the standards expected of someone with specific expertise in that field.

Advice for compliance

Be ready to fill any gaps in the board’s expertise. For instance, if you are required to manage the company’s accounts but have no experience in this field, it’s likely to be necessary to instruct an accountant to ensure you are meeting your obligations.

5. Avoid conflicts of interest

You are required to avoid situations in which you have – or where you could have an interest which conflicts or may conflict with that of the company. Examples include a director having an interest in a competitor’s or supplier’s business. Linked to this, there is also a duty not to accept benefits from third parties, which are given because you are a director and where acceptance could be regarded as likely to give rise to a conflict of interest.

Advice for compliance

Seek board approval. If the company was incorporated on or after 1 October 2008, the board can authorise a conflict situation, but only if the company’s articles of association allow for this.

6. Keep on top of filing

Directors are ultimately responsible for the preparation, accuracy, circulation and filing of the company’s annual reports and company tax return. Depending on the nature of your business, you may have additional reporting and payment deadlines to stay on top of, such as the Construction Industry Scheme and/or Employment Related Securities Return.

Advice for compliance

Make preparation of financial statements one less thing to worry about. MJH Accountancy specialises in helping company directors stay on top of their obligations, with a complete financial, business and management reporting service. From preparation of abridged accounts for Companies House filing purposes through to monthly management reports for internal use, we can ensure you are always on top of your obligations while providing ongoing visibility on the financial health of your business.

For more information about our company accountancy packages, speak to MJH Accountancy today.

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