20 FAQs people ask about your responsibilities as a director.
- Do I need any special skills or qualifications to be a director?
- What are my responsibilities to the shareholders?
- Am I responsible to anyone other than the shareholders?
- Can I have private dealings with a company I am a director of?
- What should I do if I think I have a conflict of interest?
- Are there any special rules about holding shares in a company I am a director of?
- Are there any special rules about my contract of employment?
- What returns do we have to make to Companies House?
- Can we delegate responsibility for filings to the company secretary?
- Do I need to read the company's articles of association or any other documents?
- Does it matter if I don't see management accounts and other information?
- What is my responsibility for the company's accounts?
- What board meetings do we need to have?
- What shareholder meetings do we need to have?
- Apart from company law, do I have any other legal obligations?
- What are the possible penalties for failing to exercise my responsibilities as a director?
- How can I protect myself from potential legal action?
- Does a non-executive director have the same responsibilities?
- Can I be held liable if I haven't been officially appointed as a director?
- Can I be held liable if I have resigned as a director?
1. Do I need any special skills or qualifications to be a director?
There is no legal requirement for any qualifications except in certain specific businesses (eg investment companies).
At the moment almost anyone can be a director, including both individuals and (for the time being - although the government plans to abolish corporate directors, see below) other limited companies.
There are certain limited exceptions to this general rule. A company's auditor cannot also be a director, nor can any person who:
- has been officially disqualified from acting as a director in the UK and elsewhere;
- is an undischarged bankrupt (unless they have been granted special permission from the court);
- is under the age of 16 (although an under-age individual can still acquire liabilities if they act as a director or as a shadow director - see 19 - before they are 16).
There is also an obligation for every company to have at least one natural person serving as a director (a human being, not a company).
In due course the government proposes to abolish corporate directors - the rule allowing one limited company to be a director of another. However, there may still be certain exceptions when a limited company may continue to be a director of another. Take legal advice about the ramifications for you if you want to have (or already have) a limited company director on your board.
2. What are my responsibilities to the shareholders?
Generally, a director is required to comply with certain legal duties when acting as a director, and these duties are owed to the company rather than the shareholders. The Companies Act 2006 places the following statutory duties on directors:
- To promote the long-term success of the company (rather than the interests of, say, the majority shareholder).
- To act within the company's constitution and powers, ie only do things the company is authorised to do, and that they, the directors, have power to do (rather than the shareholders).
- To exercise independent judgement (ie not take instructions from a third party or, for that matter, a dominant director, on how to run the company).
- To exercise reasonable skill, care and diligence.
- To avoid 'situational' conflicts of interest, ie any situation in which the director's interests do or may conflict, directly or indirectly, with the company's interests. This includes where a director exploits any of the company's property, information or opportunities.
- To avoid accepting benefits from third parties that are offered because they are a director (or because they did or omitted to do something as a director).
- To declare any direct or indirect personal interest in any proposed transaction or arrangement to be entered into by the company (a 'transactional' conflict) to other members of the board, either at a board meeting or in writing.
For a trading company, 'success' will often mean 'long-term increase in value'. However, it is for the directors to decide what constitutes success for their particular company and the courts, in any action against a director for breach of duty, may be reluctant to substitute their judgement for that of the directors. The Companies Act specifies a (non-exhaustive) list of factors the directors must take into account in order to show that they are promoting the success of the company, including:
- the likely consequences of any decision in the long term
- the interests of the company's employees
- the need to foster the company's business relationships with suppliers, customers and others
- the impact of the company's operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company
Directors should also consider whether, given their company's circumstances, additional or alternative factors should also be considered. In deciding which factors to take into account, the weight to be given to each, and the actions they should take in consequence, the directors must exercise due skill, care and diligence.
Template for board minutes authorising a director’s conflict of interest (situational).
3. Am I responsible to anyone other than the shareholders?
Yes. You must promote the long-term success of the company as a whole, which involves taking into account more than just the interests of the current shareholders. For example, if the company faced a cash shortage, it might be inappropriate to declare a large dividend even if the shareholders wanted you to.
As well as the shareholders, you must consider the interests of other 'stakeholders' such as creditors and employees.
You also have a responsibility for ensuring that the company complies with all relevant legislation (see 15).
4. Can I have private dealings with a company I am a director of?
Only if permitted by the company's articles of association and having disclosed all material facts to the board so that the arrangements may, if required by law, be formally approved (see 5).
The company can usually loan money to you, provided the loan is approved by the shareholders.
Any substantial private deal between you (or a person connected with you) and your company must be approved by the shareholders, eg if you sell substantial assets (worth more than £100,000 or 10% of the company's net assets, whichever is lower) to the company, or it sells substantial assets to you (or, in each case, someone connected with you). The definition of the people who are connected with you is wide. Take advice if you are proposing such a transaction.
5. What should I do if I think I have a conflict of interest?
There are two types of director's conflicts of interest - 'situational' conflicts and 'transactional' conflicts (see 2).
An example of a transactional conflict would be if you (or a member of your family) own shares in another company with which your company is doing, or planning to do, business - ie the conflict arises because of a transaction the company is to enter into.
An example of a situational conflict would be if you were in a situation (or could get into a situation) where you could exploit company property or information, or hijack a company opportunity, for personal gain. For example, if you invest in a company that competes with your own. In that case, the company itself is not entering into any sort of transaction - it is the situation you are in that is creating the conflict.
Situational conflicts are only allowed if:
- the articles of association authorise them; or
- they are authorised by a majority of the independent members of the board of directors (ie those with no direct or indirect interest in the matter). The conflicts must have been proposed to the board and, for a private company, the company's constitution must not prohibit this.
Transactional conflicts are allowed, but you are legally obliged to declare any transactional conflict of interest to your fellow directors. Depending on the terms of your articles, a transactional conflict may prevent you from voting on any resolutions relating to the transaction or arrangement in question. The default model articles of association used by many start-up and SME companies prevent a director from voting on a matter in which they have such a potential conflict, unless they obtain separate approval from the shareholders. If you do have a conflict, then your decisions as a director must not be influenced by your personal interests. Your duty is to put your company's interests first.
It is a breach of your duties as a director if you fail to declare any personal interest you have (whether direct or through someone else) in any proposed transaction or arrangement to be entered into by the company, and whether or not you are a party to it. The declaration can be given by written notice, by a declaration at a board meeting, or by a general notice to the company that you are to be treated as interested in any future transactions or arrangements with named third parties.
Also, unless you have already declared your interest in it when it was a proposed transaction or arrangement, you must declare to the directors any personal interest in any existing transaction or arrangement your company has already entered into. You must do this either at a board meeting or by general notice. Failure to declare your interest in an existing transaction is not a breach of duty, but it is a breach of the Companies Act, making you liable to a fine.
Generally, you must not use your position to make private profits at the company's expense, for example, by accepting benefits offered to you by a third party because you are a director.
One circumstance where you are very likely to have a conflict of interest is where someone offers you a benefit because you are a director, or because of something you do (or do not do) as a director. The most obvious example would be a bribe. Accepting benefits in these circumstances is a breach of duty (this will also trigger the requirement to declare an interest, just discussed). However, there is an exception if the benefit is authorised by the articles of association (or by the members in some other way), or if the acceptance of the benefit is unlikely to give rise to a conflict of interest.
Template for board minutes authorising a director’s conflict of interest (situational).
6. Are there any special rules about holding shares in a company I am director of?
Not usually, though the articles of association or a shareholder's agreement may say you have to sell your shares in certain instances - for example, if you leave the company. If you are a director, you should therefore check the company's articles or any shareholder's agreement before acquiring or accepting any shares.
A director who holds or controls shares in the company, whether directly or indirectly, may also be a Person with Significant Control (PSC). If so, they must be entered in the company's PSC register - (see 10) in our Company Administration FAQs.
In summary, if a director holds or controls more than 25% of the company's shares or voting rights (whether in their own name or indirectly), they will be a Person with Significant Control (PSC). The same applies if the director is legally entitled (directly or indirectly) to appoint or remove a majority of the board of directors of your company, or if they exercise 'significant influence or control' over your company (either directly or via a trust or firm).
If a director is a PSC, your company must:
- identify the person or company concerned
- gather specified particulars from them
- enter the particulars in your company's PSC register, and
- file details publicly at Companies House.
For further guidance on the information, you need to include in your PSC register.
7. Are there any special rules about my contract of employment?
Your contract of employment should be approved by the board of directors. If your company grants you a term of employment that guarantees you at least two years of employment (including where a contract for less than two years gives you the option to extend it beyond two years), then it must also be approved by the shareholders. There are special rules as to the notice period to be given to shareholders before approval is given - take advice.
Also, a copy of your contract must always be available for inspection by members.
Sparqa Legal has a customisable service agreement you can use to document a director’s contract of employment.
8. What returns do we have to make to Companies House?
The directors (or company secretary if the company has one) are responsible for checking that the information Companies House holds about your company is correct, and either confirm that it is or, if it is not, bring it up-to-date. You do this by making filings after certain changes to your company (see below), and by filing a 'confirmation statement' each year.
The confirmation statement replaces the previous ‘annual return’. There is a fee to pay with the confirmation statement - although you can update your company's public record as many times as you need to, but you'll only be charged once a year. It is the quickest and cheapest to file your company’s confirmation statement online.
You are also required to file a copy of your annual report and accounts at Companies House each year. Private company reports and accounts must be filed within nine months of the end of their accounting reference period.
There are automatic civil penalties for late filing of annual accounts at Companies House, depending on how late they are. These are doubled for persistent failure to file annual accounts on time.
Other filings which you must make with Companies House include:
- changes to the articles of association, and some shareholder resolutions
- changes to directors or their details
- changes to the registered office address
- if the company has one, changes to the company secretary or their details (company secretaries are optional for private companies)
- any change to the company's accounting reference date (ie your year end)
- any issue of shares or changes to the company's share structure
- if the company grants a mortgage or charge over an asset
Failing to file documents on time can lead to severe penalties for the company and its officers. For example, failing to file particulars of a mortgage or charge within 21 days after it is created can mean it is unenforceable and the money borrowed has to be paid back to the lender. Also, it is a criminal offence not to file some of this information.
Read Sparqa’s summary of all of the most common filings you will need to make, and when you are required to make them.
9. Can we delegate responsibility for filings to the company secretary?
You can, if you have one, but ultimate responsibility will still remain with the company and its directors, as well as the company secretary. The same applies if you delegate these tasks to a third party such as a provider of company secretarial services.
Private companies do not need to have a company secretary, and the majority of new start-ups and SMEs do not have one. In companies without a company secretary, responsibility for record-keeping and filing at Companies House will fall solely on the directors even if, in fact, they assign an employee to look after administrative matters.
10. Do I need to read the company's articles of association or any other documents?
Yes. The company's articles of association set out the constitution of the company, which can include:
- limitations on the powers directors have, such as borrowing money
- rules on the numbers of directors, how they are appointed, and how decisions are taken
- details of any decisions which must be agreed by shareholders
It is therefore essential that you know what the articles contain, so that you can ensure that you act within them.
Many SME and start-up companies have the default model articles of association.
As far as other documents are concerned, you will want to be aware of everything which can help you fulfil your role as a director effectively. Documents you should always see include:
- annual report and accounts
- management accounts
- strategy documents
- key policy documents (such as health and safety)
- minutes of board meetings
- information on key products, services, personnel, and so on
11. Does it matter if I don't get to see management accounts and other information?
Yes. Without the right information, it will be difficult for you to fulfil your responsibilities as a director, and therefore protect yourself from claims. Your responsibilities include the requirement to exercise an acceptable degree of care in your actions as a director.
In many companies, individual directors take primary responsibility for particular areas, such as the finance director for financial matters. Even so, every director would normally expect to see management accounts and any other important information regarding the overall position of the company. If the company gets into financial trouble, so that directors' actions are scrutinised by a liquidator or administrator, each director, whether financially literate or not, will be expected to have given their attention to the accounts, queried any aspect that they did not understand and pressed for appropriate remedial action.
12. What is my responsibility for the company's accounts?
Accounts are exempt from audit for private companies under the 'small companies regime', so long as the relevant company meets two out of the following criteria in a year:
- not more than 50 employees;
- a turnover below £10.2 million;
- net assets (ie a balance sheet total) amounting to less than £5.1 million
Micro-businesses - those with not more than ten employees, turnover of not more than £632,000 and/or a balance sheet of not more than £316,000 - are only required to produce a simple balance sheet and profit and loss account.
The annual accounts must be presented for board approval, and the balance sheet signed by a director. The board must also approve and sign off the directors' report. Companies that do not meet the requirements of the small companies regime (see above) are required to also prepare a strategic report which includes a business review (previously part of the directors' report). Larger companies may also be required to prepare additional reports. The process of putting together annual accounts and then filing at Companies House can be a time-consuming and complicated process. It is therefore advisable to obtain the assistance of an accountant.
Full financial statements must be circulated to the shareholders. The directors are also legally responsible for filing the accounts with Companies House (see 8).
13. What board meetings do we need to have?
You need a board meeting whenever you need to take a decision which requires board approval. To some extent, this will depend on the company's articles of association and how much authority has been delegated by the board to other personnel. You must also hold a board meeting if any director asks for one.
In practice, you will need at least one board meeting annually to approve the annual accounts. As a director, you also need to ensure that the number of board meetings you have (and the matters on the agenda and the way the meeting is conducted), show you are complying with your duties as a director - for example, that each of you is promoting the long-term success of the company and exercising independent judgement. Most companies hold regular board meetings - quarterly or monthly - to review management accounts, discuss strategy and so on.
Of course, these meetings can be supplemented by informal meetings of some or all of the directors for discussions where formal board approval is not required.
If you cannot physically attend a board meeting, then most articles of association (including the default model articles of association) allow directors to take part by electronic means such as telephone or videoconference, for an 'alternate' to attend in their place, or for decisions to be made by every director signing an identical 'written resolution in lieu of a meeting' rather than attending a meeting.
This checklist for passing a board resolution contains step-by-step guidance to taking decisions at a board meeting.
14. What shareholder meetings do we need to have?
Private companies are free to pass written shareholder resolutions by default, and are not otherwise required to hold an annual general meeting of the shareholders unless their articles of association specifically require them to. This has made shareholder general meetings much less common.
However, from time to time the directors may find that a decision needs to be made that has to be referred back to a shareholder meeting - usually because of the Companies Act, the company's articles or because some outside agreement such as a shareholders' agreement says they must. For example, the Act says that a decision to remove a director from office or remove a company’s auditor from office can only be made at a general meeting.
Otherwise, for most shareholder decisions in start-ups and SMEs, circulating a written resolution will generally be quicker and easier than calling a general meeting.
15. Apart from company law, do I have any other legal obligations?
Yes, there are circumstances in which you can be held personally responsible for business decisions which are effectively unlawful, for example under the Health & Safety at Work Act.
The board must ensure that the company complies with all legislation and regulations relevant to its business. You should ensure that at least one of the directors is familiar with each of the following areas of the law:
- health & safety
- insurance obligations
Check that your business is complying with its legal obligations, and get guidance on steps you can take to reduce any potential risks
16. What are the possible penalties for failing to exercise my responsibilities as a director?
You could be held personally liable for losses resulting from illegal acts, acting beyond your powers, or failing to use sufficient skill and care.
You could become personally liable for company debts if you allow the company to trade while it is (or is likely to become) insolvent. If the company has difficulty meeting its financial obligations the directors should seek advice from an insolvency practitioner.
Some types of conduct can lead to disqualification from being a director. You might also be fined or face criminal prosecution - for example, for failing to keep proper accounting records, for fraudulent behaviour, or for serious health and safety shortcomings.
You should keep yourself informed about what is going on in the business, and participate in its management, which means you should not sit by and let other directors act without being prepared to challenge them, no matter how dominant those other directors might be.
You are also expected to keep yourself informed about what is going on in your company, whether or not it is in an area that is your primary responsibility. It is therefore risky for directors to turn a blind eye to, or fail to pay attention to, anything going on in their company - particularly in relation to the company's financial situation. Directors can be held jointly and severally liable if they act in breach of their responsibilities.
Take advice if you are concerned about potential liabilities as a director.
17. How can I protect myself as a director from potential legal action?
You need to understand your role within the company and the law relevant to that area, and to take an active approach to fulfilling your responsibilities.
You should avoid sitting idly by, assuming that other directors can safely be left to manage the company's business (see 16). For example, you should insist on regular financial reports as to the company's situation and projections, and apply your mind to them when you receive them.
If you are not happy with the way the company is being run, you may wish to require a board meeting to discuss your concerns. Where you disagree with a decision, it is always a good idea to ensure that this is noted in the minutes of the meeting, together with your reasons. This can be particularly important if the company's financial situation is poor. If the company subsequently becomes unable to pay its debts, a liquidator or administrator can report on the conduct of each director, which could lead to disqualification as a director and, in some instances, personal liability. You may even wish to keep a private record of events and decisions, and your part in them.
If you are concerned that things are not as they should be, take legal advice personally.
You may also want to consider whether it is worth having directors' and officers' liability insurance. Although this cannot protect you from legal action, it can, in certain circumstances, cover the costs of legal advice and damages awarded against you by a court. Cover can be limited, and premiums can be expensive, but in certain circumstances and provided the articles of association give the necessary authority, it may be paid for by the company.
Take advice if you are concerned about potential liabilities as a director.
18. Does a non-executive director have the same responsibilities?
In general, yes.
In practice, you might not be required to show the same degree of care and skill as, for example, a qualified accountant who acts as the finance director. It would not be advisable to rely on this as an excuse for not meeting your responsibilities, however.
If you are concerned about the extent of your responsibilities as a non-executive director, seek separate advice.
19. Can I be held liable if I haven't been officially appointed as a director?
If you are a 'de facto' director - ie you act as a director even though you have not been officially appointed - you could be held liable. The same can also be true if you are a 'shadow' director - ie you are not on the board, but you still exert influence over the directors.
Like anyone else, you could also be held liable for your acts as an individual: for example, discriminatory behaviour.
Any concerns regarding liability of ‘de facto’ or ‘shadow’ directors will require specific legal advice.
20. Can I be held liable if I have resigned as a director?
If you continue to exert influence over the board (in which case you may be treated by the courts as a 'shadow director') after your resignation, you can still be liable.
Also, resigning as a director does not allow you to walk away from problems that occurred while you were a director - you retain responsibility for things you did (and sometimes things that you did not do), or that happened, on your 'watch'. For example, if the company subsequently becomes insolvent, the official receiver (or administrator, etc) will look into the conduct of the directors over the previous three years.
If you are concerned about your potential historic liabilities as a director, seek advice.