New businesses and directors’ responsibilities

One of the points to consider when starting a new business and choosing the trading medium is the appointment of directors, and the duties placed on them.

Company directors are responsible for the management of their companies. They must act honestly and promote the success of the business and benefit its shareholders. They also have responsibilities to the company’s employees, its trading partners, and the state.

Appointment of a director

Companies Act 2006 Part 10 Chapter 1 defines the rules governing the appointment of a company director. Every private limited company must have at least one company director. At least one of the directors must be an actual person (as opposed to another company). The requirements state that a person of at least 16 years of age may become a company director.

Persons who are currently disqualified from being a company officer or those who are undischarged bankrupts are prohibited from being company directors.

It is only possible to appoint a corporate director if there is at least one other director that is a natural person.

Apart from the disqualification and bankruptcy provisions, in reality, Companies House will accept nominations for any persons the shareholders of a given company deem fit to act in that capacity.

Executive, non-executive, de facto and shadow directors

• An executive director is a member of a company's board of directors who is actively involved in the day–to–day management of the company. Executive and non-executive directors are formally appointed and registered at Companies House.
• A non–executive director is a member of the board who is not involved in the day–to–day management of the company.
  It is important to note that non-executive directors have the same legal responsibilities as executive directors.

• 'De facto' director is a person that acts as if they were a director. For example, if a person resigns from being a director but continues holding themselves out and making decisions as a director.
• A shadow director is one under whose instruction other directors act; usually a shadow director makes no claim to be a director, but they are able to influence the company’s affairs in the same manner as an appointed director. Companies Act 2006 defines a shadow director in s.251 as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. The concept of a shadow director is designed to catch out those who want to exercise director-level influence over a company’s affairs without wishing to shoulder a director’s responsibilities.
• Shadow and de facto directors are subject to many of the legal responsibilities and are subject to many of the penalties as other directors.

Companies House and information about the directors

The Companies House register is inspected thousands of times a day by people wanting to do business with a company. For this reason, the information provided when setting up a company and any subsequent changes are made publicly available for anyone to inspect. To benefit from limited liability, your company details must be open and transparent.

The appointment, departure or change of particulars of any director must be reported to Companies House within 14 days, using the appropriate form.

A director of a company needs to supply two addresses, one where Companies House can send correspondence (a correspondence address) and the second is their home address (or usual residential address).

The correspondence address appears on the public register, for all to see, but residential address is kept on a private register that’s only available to certain public authorities such as the police.

Directors’ duties

There are three main elements to the directors’ duties: the fiduciary duty, the duty of skill and care and specific statutory duties:

• Fiduciary duty – is a legal obligation of one party to act in the best interests of the other party. The courts have always regarded directors as being ‘fiduciaries’ and as a result the directors are required to act in good faith, in the best interests of the company and must not abuse the trust and confidence placed in them.
• Duty of skill and care – a director of a company must exercise reasonable care, skill and diligence. Directors with particular skills are expected to bring those skills for the benefit of the company.
• Statutory duties – are duties imposed by Companies Act as well as other relevant legislation. The Act ‘codifies’ long-established common-law principles by spelling them out in section 170-177. Duties stated in the act include: duty to act within the company’s powers, duty to promote the success of the company, duty to exercise independent judgements, duty of skill, care and diligence, duty to avoid conflicts of interest, duty not to accept benefits from third parties and duties to declare interest in a proposed transaction or arrangements. The directors have other duties in areas such as health and safety, bribery law, employment law and tax, etc.

Conclusion

Setting up a company is now a cheap and easy process but there are governance laws that need to be understood. As the regulatory environment has become more and more onerous a newly appointed director needs to understand the full extent of the legislation and how it affects his responsibilities. It is important that any director whether of a big or small company is familiar and complies with his duties.

In particular, in small companies where family members are appointed just to make up numbers, they must ensure that they are aware that they cannot simply sit back and have no involvement in the company. All directors are jointly responsible for the company and the duties towards it. Ignorance is no defence and the consequences can be severe both for the company and the individuals personally.

More information

Are you an accountant or a de facto director of your client’s business?