Directors Responsibilities

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Directors Responsibilities

Solution 1. Introduction

The office of director in the UK carries with it stringent common law and statutory duties and responsibilities. Failure to comply could result in financial penalties or even disqualification or imprisonment. Any director who is unsure of his position should take legal advice immediately.

2. Persons affected

Directors - persons actually appointed directors.

Non-executive directors - non-executive directors are directors for all purposes, as the law makes no distinction between executive and non-executive directors.

Shadow directors - a shadow director is defined as "a person in accordance with whose directions or instructions the directors of the company are accustomed to act". A shadow director is deemed to be a director for many purposes under the companies legislation and is liable as such.

Alternate directors - the Articles of Association of some companies allow directors to nominate alternate directors to attend and vote at board meetings if they are unable to do so themselves. It is possible that the courts may regard alternate directors as directors.

3. Appointment, retirement and removal of directors

Every private company must have at least one director and every public company a minimum of two.

Appointment, retirement or removal is usually regulated by the Articles of Association.

A director can resign at any time by notifying the company in writing.

The retirement or removal of a director does not affect his responsibility for his actions whilst a director.

4. Remuneration of directors

Directors who work full-time for the company will normally be employees and entitled to be paid as employees.

Directors as such have no general right to remuneration. However, the company's Articles of Association usually contain a power to pay remuneration.
5. Shareholders and directors meetings

The directors of a company must convene an annual general meeting of shareholders in each calendar year, not more than 15 months after the previous AGM.

Private companies can avoid some of the formalities relating to general meetings by adopting a simplified procedure.

Other shareholders' meetings can be convened as necessary for specific purposes.

Directors' meetings are held as necessary in accordance with the procedure set out in the Articles of Association. Reasonable notice of meetings should be given, a quorum should be present and minutes must be kept of the meeting.

6. Obligations imposed by common law

Directors owe a duty to use reasonable skill and care in discharging their duties and are required to act in good faith in what they consider to be the interests of the company and not for any collateral purpose. The interests of the company are not necessarily the same as those of its shareholders.

In addition, directors are obliged to separate their own interests from those of the company. Where a director profits personally from his position, he must account to the company for such profit, in the absence of full disclosure to and the approval of the rest of the board or the shareholders. If the company suffers loss as a result of its money being applied by the directors for purposes which it cannot sanction, the directors are liable to replace the money, however honestly they may have acted.

7. Duty to keep records

Accounting records - accounting records must be kept which reveal a reasonably accurate picture of the company's financial position and enable the directors to prepare annual accounts. Accounting records must be kept for a minimum of three years (six years for a public company) while VAT records must be kept for six years.

Records - directors must maintain accurate records in the form of registers of shareholders, debenture holders, directors and secretaries, charges and directors' interests in the company's shares and debentures. These are open to inspection by the public.

Minutes - minutes of all directors' and shareholders' meetings must be kept.

Tax and National Insurance records - directors are responsible for keeping accurate records for making punctual returns relating to VAT, employees' PAYE, income tax, employees' and employers' National Insurance contributions and corporation tax.

8. Duty to disclose information

Letterheads and other documents - the company must disclose the company's name, place of registration, registered number, registered office and the names of all the directors (or none of them) on certain documents including letters, bills of exchange, letters of credit, cheques and invoices.

If the company uses a trading name the documents must include the full company name and an address for service of documents.

Failure to include the name of the company on a bill of exchange or a cheque will result in the director who signs it being personally liable for the whole sum due if the bill of exchange or cheque is not met.

Office - the company name must be displayed conspicuously outside every office and place of business.

Returns to the Registrar - documents relating to certain matters must be filed with the Registrar of Companies including the appointment and resignation of directors and the secretary, the registered office, special and extraordinary and elective resolutions of meetings of shareholders and ordinary resolutions which increase the company's authorised capital, the Memorandum and Articles of Association, alterations to the share capital, charges on company property, the accounting reference date, the accounts and the directors' report, the annual return and winding up.

Preparation of accounts - directors are obliged to prepare true and fair accounts for each financial year of the company. Unless the company is a private company and an elective resolution is in force, these must be laid before the company in general meeting together with the directors' report and auditors' report. The directors must file copies with the Registrar of Companies within ten months after the end of each accounting reference period in the case of a private company and within seven months after the end of an accounting reference period in the case of a public company.

Annual Return - directors are also responsible for ensuring that a company files an annual return with the Registrar of Companies every year giving information about the officers and shareholders of the company.

Documents available for inspection by the public - the following registers must be available for inspection by the publis, members, debenture holders, directors and secretaries, director's interest in the company shares, charges.

9. Capital and maintenance of capital
Directors powers to issue shares - Directors must not allot shares unless so authorised by the shareholders or the Articles.

Shareholders pre-emption rights - Except where the pre-emption rights contained in the Companies Act have been excluded by the shareholders or the Articles, directors must not allot shares unless they have first been offered to existing shareholders in the same proportions as their existing holdings.

Minimum capital - Directors of a public company must call a shareholders' meeting if the net assets of the company fall to one half of its called up share capital.

Purchase and redemption of a company's own shares - In certain circumstances a private company may purchase its own shares out of capital, but the directors must first make a statutory declaration as to the company's solvency over the coming year. The directors who make the declaration may be personally liable if the company is wound up within a year.

Financial assistance for the acquisition of a company's shares - In certain circumstances a private company may provide financial assistance for the purchase of its own shares, but the directors must comply with detailed rules for the filing of statutory declarations as to the company's solvency.

Distributions and dividends - Directors must ensure that the proper procedures relating to the declaration and payment of dividends are observed and that distributions are only made out of profits available for that purpose.

10. Other obligations under the Companies Act 1985

These are wide ranging. Below are the duties most relevant to a director concerning his day to day relationship with his company.

Loss of office payments - before payments may be made to a director as compensation for loss of office, full disclosure must be made to the shareholders of the company and their approval obtained.

Substantial property transactions - The law prohibits substantial property transactions between a company and any of its directors without the approval of an ordinary resolution of the members in general meeting. "Property" does not mean only land and premises, but comprises all non-cash assets.

Contracts in which a director has an interest - a director is obliged by law to disclose at a meeting of the directors any interest that he may have in a contract entered into or proposed to be entered into by the company.

Service Agreements - any contract giving or capable of giving a director more than five years employment must be approved by ordinary resolution of the shareholders. A service contract which cannot be terminated within twelve months must be available for inspection by shareholders.

Disclosure of director's interests in shares - directors are obliged to notify a company in writing of their interests in shares in the company and any changes therein.

Prohibition of directors' loans - the Companies Act prohibits a company from making a loan to a director or providing a guarantee or security for such a loan. In addition a public company cannot make a loan or "quasi-loan" or enter into a credit transaction or provide a guarantee or security for a director or certain persons connected with him.

11. Obligations to third parties

As a result of carrying out his duties a director will often find that he owes duties to third parties. For example:-

To subscribers for and purchasers of securities - directors are liable to pay compensation to investors in the company for loss suffered by them as a result of untrue or (in some cases) misleading statements included in listing particulars or a prospectus.

To customers, suppliers and other contracting parties - whilst directors are not normally liable to third parties on contracts made between their company and such third parties, a director may be personally liable:

· on cheques or orders for money or goods signed by him unless the document correctly states the full name of the company

· for damages if he makes negligent or fraudulent misrepresentation in the course of negotiating a contract between his company and a third party

· for damages for breach of his implied warranty of authority if he concludes a contract on behalf of the company but exceeds his authority and the company therefore sets it aside

· on any contract if the director does not make it clear during negotiations or in the contract itself that he is contracting in his capacity as a director of the company

12. Duties as employee

Many (but not all) directors are employees of their company and owe additional duties to it by virtue of the terms of their contracts of service, for example:

· devotion of their full time and attention to the company's business

· performance of a specific role within the company, e.g. technical, financial or sales director

· restraint from competing with the company after leaving.

13. Responsibility for tax

Many statutory provisions concerning tax offences now make directors personally liable for the tax and penalties due by the company.

14. Environmental protection responsibilities

Environmental protection law imposes liability upon a director for offences committed by his company. Such offences include the breach of controls imposed to prevent both damage to the environment and to ensure the safety of those who inhabit it. Relevant legislation includes the Health and Safety at Work Etc. Act 1974, the Environment Protection Act 1990, the Environment Act 1995, the Town and Country Planning Act 1990 and the Fire Precautions Act 1971.

15. Duties under the Insolvency Act 1986

Wrongful trading - the courts are empowered to order any director or shadow director of a company to make a personal contribution to its assets if the company has gone into insolvent liquidation and that director or shadow director knew or ought to have concluded that there was no reasonable prospect of avoiding such a liquidation.

The court will make no order if it is satisfied that, once the director concerned knew or ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation, he took every step with a view to minimising the potential loss to the company's creditors which he ought to have taken.

Fraudulent trading - if, in the course of the winding up of a company, it appears that the business has been carried on with intent to defraud creditors or for any other fraudulent purpose, the court may order the person concerned to make such contribution to the company's assets as it thinks proper. This person can also be disqualified as a director and fined or imprisoned.

Use of company name - when a company goes into insolvent liquidation, a person who was a director or shadow director within the preceding twelve months is not permitted for five years (except with the leave of the court or in certain prescribed circumstances) to act as a director or take part in the management of a company or business which is known by the same name as the company in liquidation or by a name which is so similar as to suggest some association with the company.

16. Directors Disqualification
Any director or company can be disqualified under the Company Directors Disqualification Act 1986. A disqualification order can run for between 2 and 15 years and prevent a director from being a director of any company or being involved in the promotion, formation or management of a company without leave of court. Breach of the order involves criminal consequences as well as being personally liable for any debts incurred.

A new "fast-track" procedure was introduced by the Insolvency Act 2000 allowing directors to give an undertaking with similar restrictions to the order. The new procedure may only be used in relation to unfitness to be concerned in the management of a company (i.e. not in relation to wrongful or fraudulent trading).

Undertakings will only be used where it appears to the Secretary of State that it is in the public interest to accept this method rather than the existing court procedure. The Secretary of State can still choose the court procedure even if the director agrees to give an understanding.

A new review system is also introduced where the court can reduce or terminate the undertaking in the same way as a disqualification order.

Breach of an undertaking has the same criminal and civil consequences as breach of a disqualification order.

It should be noted that a company as well as an individual can be the subject of a disqualification order.

It is therefore essential that directors ensure that appropriate steps are taken to monitor their companies' financial position on a regular basis.

If the board does not take the action which the director considers appropriate, he should seek legal advice on his personal position.

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Article ID:	118
Category:	Small Business
Date added:	15-02-2009 07:46:21
Views:	252
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