Do you understand your responsibilities as Director of a Limited Company?

Back 25 July 2019
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If you have recently taken on a role as Director of a Limited Company, that’s fantastic, congratulations!

With this, you have also taken on seven statutory duties, as defined by The Companies Act 2006, as well as several financial and legal responsibilities.

Below we provide an overview of what these duties and responsibilities are, highlighting possible implications of failing to abide by these duties and responsibilities, and indicate the areas where Blue Rocket can provide support for you and your business.

 

Your seven duties as a company director

The Companies Act 2006 outlines seven statutory duties of company directors.

 

1. To act within your powers under the company’s constitution

The most important part of this first duty is establishing a set of rules for your company and your board, known as the articles of association. All limited companies must have these.

Set by The Companies Act 2006, ‘model’ articles of association are available for use and you can download them here. 99.9% of companies use these model articles, the only time they really need to change is if you have different classes of shares or votes which require consideration.

 

2. Duty to promote the success of your company

The Companies Act 2006 states that “a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”

 

In doing this, a director must:

 

  • Give consideration to the likely long-term impact of any decisions

  • Keep in mind the interests of employees

  • Understand the need for the business to build relationships with suppliers, customers and other stakeholders  

  • Be mindful of the impact the company’s operations has on the environment and neighbouring community

  • Build a reputation for high standards of business conduct, to maintain the company’s desirability  

  • Act fairly between members of the company

 

Since the beginning of the year, larger companies with more than 250 employees are now required to report on how they have fulfilled this duty in their annual report.  

 

3. Duty to exercise independent judgement

As a director, you can’t just implement the actions dictated by other parties, other shareholders for example. You are required to have your own knowledge and to use that to form your own informed ideas about the company and its operations.

 

4. Duty to exercise reasonable care, skill and diligence

It is assumed that as a company director, you are a reasonably diligent person and that you would act with the same care and skill expected as such, in the carrying out of your role.

 

This duty is measured both objectively and subjectively, and The Companies Act states you are required to poses:

 

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

  • the general knowledge, skill and experience that the director has

 

There have been instances where we have had to flag up to a company’s MD when someone – for example a Finance Director or bookkeeper - isn’t doing their job correctly, or alert an MD to unusual looking finances. On the flipside, we’re also great at highlighting when someone is doing a great job.

 

5. Duty to avoid conflicts of interest

A director must avoid situations where he/she has a direct or indirect interest which conflicts, or may possibly conflict, with the interests of the company.

Examples of these kinds of conflicts include: a director using an opportunity or information which belongs to the company where he/she can make a profit as a result of that directorship; a situation where a director sits on two boards and it is not possible to reconcile his/her duties to the two companies; relationships of a business or personal nature between the director and persons – for example a spouse, partner, parent, child or other close family member - or entities that are affected by the company’s activities, plus many other situations.

If such a conflict arises, it is essential that a director discloses the situation to other board members. If disclosed in advance, it could be authorised by the non-conflicted directors on the board, or a decision can be made about how to manage the conflict in order to maintain the integrity of the board’s decision-making.

If a director wants to bring in a new shareholder, or invest in another project for example, 9 times in ten that director will have some form of connection to that new shareholder or people involved in the other project. We are often asked to sit in on board meetings and to take notes, to ensure that any interest is disclosed and recorded properly.

 

6. Duty not to accept benefits from third parties

To avoid any question of objectivity, gifts or benefits – both monetary and non-monetary - from third parties are to be avoided.

 

7. Duty to declare interest in proposed transaction or arrangement with the company

A director is required to declare the nature and extent of any direct or indirect interest he/she has, or may have, in a transaction or arrangement with the company, before it is entered in to. If there is an existing interest, it must be declared as soon as possible. Disclosure also extends to a person connected with the director, for example, his wife and children.

 

As outlined in The Companies Act 2006, this duty is not infringed if:

  • if it cannot reasonably be regarded as likely to give rise to a conflict of interest

  • if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware), or

  • if, or to the extent that, it concerns terms of his service contract that have been or are to be considered

    • by a meeting of the directors, or

    • by a committee of the directors appointed for the purpose under the company's constitution.

 

A famous case of this was in 1992, when Lord Alan Sugar was Chairman of Amstrad and Tottenham Hotspur. Sky secured the rights to the live Premier League football but, because Amstrad made Sky’s dishes, it resulted in a conflict which had to be disclosed.   

Financial and legal responsibilities, and possible penalties

As a company director, in addition to the seven statutory duties, you also have a number of financial and legal responsibilities. Even if you employ an accountant, you are ultimately responsible to ensure that the below activities are carried out in a timely manner.

 

If you fail to abide by your duties and responsibilities as a director, it’s usually the company which takes action, with possible consequences including removal from office, an interim injunction, company property being restored, transactions being set aside, damages or compensation being paid for any financial losses and criminal fines.  

 

  • Keep accurate and up-to-date accounting records, which provide a true representation of your company’s financial position. If you fail to do this and your accounts are declared inaccurate, there is a fine of up to £3,000.

  • Stick to the deadlines for submitting accurate company accounts and file them with Companies House. If you are late, there is an automatic fine of £150, which rises to £750, then £1,500 if unpaid. Ultimately, you could be struck off.

  • Complete and submit your corporation and personal tax returns. If you are just one day late, there is a fine of £100 payable to HMRC, plus any tax due.   

  • Ensure you pay your staff - and yourself - correctly, including NI contributions, deduction of income tax and pension contributions. Penalties include a damaged reputation if you fail to pay your staff correctly, interest charges on late payments of income tax and The Pension Regulator contacting your staff directly if you don’t pay pension contributions correctly.

  • You must run a solvent business. If your business is insolvent and you continue to run it you may be liable for any credit, because you should have stopped trading. In 2018, The Budget has seen the return of HMRC as a preferred creditor in insolvency cases. At the moment, if you owe HMRC money and your business is insolvent, you could fold the company and start up again the very next day. In 2020, this change will make it harder for businesses to do this, and ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC.

  • Complete and file an annual Confirmation Statement, which includes maintaining an up-to-date Persons with Significant Control register. If you fail to do this, you could be struck off and face fines of up to £3,000.

  • Notify Companies House of any changes to company directors and changes of address.

 

To find out how Blue Rocket can help you and your business to comply with the above duties and responsibilities, please get in touch with our team by calling 01322 555 442 or via email  happytohelp@bluerocketaccounting.com.

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