Most people who are offered a directorship are usually so pleased to get a seat “with the grown-ups” that they rarely stop to think about what being a director involves, and what it requires of them.
In owner-managed businesses, directors who are also shareholders often assume that they can do what they want with the company, even treating it as a personal piggy-bank. That is a mistake.
Under case-law stretching back well over 150 years directors have been required to act in the best interests of shareholders and creditors, to ensure that they do not make secret profits (i.e. that they do not divert business opportunities away from the company to themselves or another entity in which they have an interest), that they do not compete with the company and that they do not trade when there is no real prospect of avoiding insolvency. A failure to abide by the law can result in personal civil liability for the directors and, in some instances, can constitute a criminal offence.
The Companies Act 2006 codified the duty of directors although much of the previous case law remains relevant. The seven key duties of a director are:
To act within powers.
To promote the success of the company.
To exercise independent judgment.
To exercise reasonable care, skill and diligence.
To avoid conflicts of interest.
Not to accept benefits from third parties.
To declare an interest in a proposed transaction or arrangement.
The statutory duties are owed to the Company itself, and only the Company can enforce them, although in some circumstances shareholders can bring an action on behalf of the Company. But if you own the Company, why should you care? Well, you may not always own the Company – you may sell or you may have the Company taken from you by a liquidator if you run into financial difficulty. In those circumstances it may be worthwhile for the liquidator/new owner to take action against the former directors in order to maximise returns for shareholders and creditors. Furthermore, where your Company starts to experience financial difficulty, the directors will start to incur duties to the creditors as well as the Company, and in those circumstances the directors may need to prioritise the interests of creditors over those of others.
What if I stay off the Board but appoint someone else to run the Company under my direction, can I avoid liability that way? – no, besides the risk that the puppet director may not do what you tell him/her to do there is a very strong chance that you will be held to be a “Shadow Director” and incur all the same liabilities and duties as a director who appears on the register at Companies House.
If you have any questions about your role and responsibilities as a director, please do not hesitate to contact Iwan Emanuel on 01494 893 570.