Five things you always wanted to ask about being a company director

22 Feb 2019

So, you have a company and you are a director, now what? 

Most problems arise when directors forget that the company is a separate and (to all intents and purposes) “living” thing: it has a legal identity that is all its own. If you treat the company as part of you, then you will almost certainly get into trouble. This applies even where you are the sole shareholder.

I have advised in many cases where the company has become insolvent, and as part of the insolvency process, the Liquidator identifies failings on the part of a director in respect of the duties below. This can result in disqualification under the Company Directors Disqualification Act and, under section 15A of the same Act,  the court can make a Compensation Order against a director. In addition, if the director has taken monies from the company, these can be treated as a loan and repayment sought from the director.

You will be relieved to know that there are just five duties on a director which are set out in the Companies Act 2006.

1. You must act within your powers.

Every company has articles of association as part of its being incorporated. Most companies will use the standard or ‘model’ articles, some will have bespoke articles. Familiarise yourself with these articles. If some of the articles could usefully be amended, then seek legal advice. You may feel that the model articles, good as they are, are not a ‘good fit’ for your company. The sting in the tail here is that if you act outside your powers and the company suffers loss, you might be liable for those losses.

2. You must promote the success of the company.

If your company employs 250 people, then you will be aware of the new (2019) requirement to report on this duty in the company annual report. If your company is smaller, then you have a duty to promote the company for its stakeholders: employees, shareholders, suppliers, and clients. The only problem comes, usually, when a director subordinates the interests of the company either to her or his own interests or to the interests of a third party.

3. Directors must use their own good judgement.

Most of the problems arise here when a director subordinates their judgement to the interests of a controlling shareholder. Furthermore, there is nothing to be gained in going along with the other directors for the sake of it.

4. Directors must exercise reasonable care skill and diligence.

What you are looking at here is the ordinary skill and experience from a reasonably competent director. But if you are a professional, you will be held to a higher standard.

5. Duty to avoid conflicts of interest.

More often than not, a fellow director may be engaged in one or more businesses which are similar in nature. If this is the case and you, as a director, find yourself in this position, make sure you declare it to the other board members. They can then take steps to deal with the situation in order to minimise or avoid any potential conflict. If you stand to gain from a transaction, then declare that transaction to the remaining board members.

Further reading

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