Understanding your responsibilities as a company director

As a company director you have the opportunity to shape the strategy and success of a business, but with great power comes great responsibility. As a company director your responsibilities are great and must be adhered to so as to mitigate any risks and liabilities and ensure the success of the business.

It is important to be aware that your job title should not depend on your personal view and how comfortable you are with a certain title. Your title has legal implications as well as responsibilities and accountability and as such is extremely important that you do not overrate your position. If you own a limited company, then you should call yourself a director. If you are sole trader you should call yourself the owner (1)

The Companies Act 2006 imposes certain general duties upon a director of a UK limited company, including:

• Duty to promote the success of the company for the benefit of its shareholders, whilst considering the impact on employees, suppliers, customers/clients, communities and the environment.
• Duty to exercise independent judgement when making decisions for the good of the business.
• Duty to exercise reasonable care, skill and diligence.
• Duty to avoid conflicts of interest
• Duty to not accept benefits from third parties.
• Duty to declare interest in a proposed transaction/arrangement (2).

Company directors are responsible for keeping up-to-date records. There are restrictions on certain transactions, such as securing a loan from the company. Any breach of a directors’ duties could see a director held liable as an individual and/or liable along with their company.

Who am I responsible to for my general duties?

As a company director your general duties are owed to the company you are a director of and to individual shareholders or other companies. It is the company itself that can take action against a director if there has been a breach of duty.

Proceedings against a director are typically made by the board, or by a liquidator of the company if it finds itself in an insolvency situation. A shareholder, or group of shareholders, can also bring a claim against a company director for breach of duty on behalf of the company. This is known as a derivative action (3)

What penalties might a director face for a breach of general duties?

There are numerous options available to the company for a breach of general duties by a director. Typically these include:

• An injunction
• Damages
• Compensation
• Criminal fine

If a director finds that he/she has acted in a way that breaches general duties, they may be entitled to some help, such as:

• The breach may be ratified by resolution of the company’s shareholders
• The court may grant relief if the director acted honestly and reasonably
• The company may have business insurance for its directors
• The company may offer to indemnify the director against costs incurred in successfully defending a claim for breach of duties.

Why take legal action against a company director?

Legal action can be taken against the most conscientious of directors by virtue of their position if someone under their command has made the mistake causing a financial loss.

Action can be brought against a company by someone who has suffered a financial loss, however, if their claim against the company fails they may take action to sue a director personally (4). This can also occur if the company is no longer trading or if the person has a grievance against the individual rather than the company.

When do company directors become personally liable for company debts?

Overdrawn directors’ current account – As a company director you can take advantage of favourable tax rates on dividends. However, if your company begins to struggle financially, and you as a director continue to draw dividends, the tax rate increases. And because too little tax has been paid, you as the director can become liable for an overdrawn director’s account which owes money to HMRC.

The directors’ current account can be difficult to understand if you are new to being a company director, it is advisable to ask your accountant to explain it to you at the outset so you understand it and mitigate an avoidable tax liability.

Personal guarantees – Personal guarantees to secure loan funding can mean a director will become personally liable should the company be unable to pay. In some cases the lender can claim against a director’s assets and property.

Shareholder agreements – Shareholders agreements can stipulate that directors must provide security for company debts for which they are personally liable.

Pension schemes – This point has had much news coverage in recent years on the back of many companies closing with black holes in their pensions pot. A company director can be held personally liable for a debt due under section 75 of the Pensions Act 1995 (5) in regards to the winding up of a pension scheme whereby they have been served with a contribution notice by the Pensions Regulator.

Fraudulent ways of accumulating debts – Accepting payment for goods which the director knows will not be delivered and obtaining finance by using inaccurate information are two examples of accumulating debts fraudulently for which a director will be liable (4).

How can I protect myself as a company director? 

Since the 2009 market crash and the subsequent recession, and with reports of company directors taking huge sums of money out of companies at the same time their company was struggling financially, the role and actions of company directors has been thrust firmly into the spotlight.

Many directors naively believe they have no personal liability, yet directors, managers and supervisors can face allegations and legal proceedings for which they may be personally liable if they have acted without proper authority or have breached the Companies Act 2006. Only shareholders have limited liability.

Directors & Officers insurance can provide cover for claims from creditors, employees, regulatory bodies (including the Health & Safety Executive and Her Majesties Revenue & Customs), customers and suppliers.

The policy offers protection for a director’s or officer’s personal assets in the event of a claim of actual or alleged “wrongful acts” when acting within the scope of their managerial duties.

The cover provided under the Caunce O’Hara D&O policy provides cover from £250,000 up to £1,000,000 and is included as part of the business combined liabilities insurance policy. The policy effectively removes the financial risk faced by directors and officers, giving them protection should an allegation or claim be made against them.

Considering certain investigations can cost thousands, can you afford to be without this cover?

[Click here to start your quick online quote for Directors & Officers insurance]

The role of the company director is not straightforward. To find out more detail about what is expected of you in the eyes of the law it is advisable to familiarise yourself with the Companies Act 2006, Chapter 2: General duties of directors – https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2

Sources:

1. https://smallbusiness.co.uk/which-job-title-is-right-for-you-19679/
2. Companies Act 2006, Chapter 2: General duties of directors – https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2
3. https://www.lexisnexis.co.uk/legal/guidance/derivative-claim-what-it-is-when-to-use-it
4. https://www.alanboswell.com/news/liabilities-of-company-directors/
5. https://www.legislation.gov.uk/ukpga/1995/26/contents/enacted

https://www.thepensionsregulator.gov.uk/en/document-library/codes-of-practice/code-12-circumstances-in-relation-to-the-material-detriment-test

https://www.gov.uk/guidance/being-a-company-director

https://companieshouse.blog.gov.uk/2019/02/21/7-duties-of-a-company-director/

https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-director

Companies Act 2006, https://www.legislation.gov.uk/ukpga/2006/46/contents

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