Whilst shareholders are the owners of Limited Companies the job of running them rests with the directors and they must do so for the benefit of the shareholders whilst ensuring compliance with the law.
Directors can be liable to penalties if information is not sent to Companies House on time. They must approve the annual accounts and are also responsible for all the general day to day running of the company including matters such as health and safety. Acting improperly can lead to fines, disqualification from being a director, personal liability for the company’s debts or a criminal conviction.
Appointment of Directors
Appointment of new directors, resignation of directors and change of directors details needs to be notified to Companies House on forms AP01, TM01 and CH01 respectively for actual persons within 14 days. For corporate directors the forms are AP02, TM02 and CH02 respectively.
Private limited companies must have at least one director and public limited companies must have at least two. If a limited company only has one director, the director must be an actual person. In general anyone can be a director, but all directors must be aged at least 16. A director must also not disqualified by the court from acting as a director and must not be an undischarged bankrupt – if you are, you need the court’s permission.
The Articles of Association set out the rules for how the company is to be run including for example how many directors there should be, how long they can serve and what happens at the end of their term.
Directors’ powers and financial liabilities
The powers of the directors are limited by the company’s Articles of Association, although these are usually very widely drawn. These can for example restrict the type of business activities allowed or monies that can borrowed, so it is important to check them.
A director is expected to have the skill expected that a reasonable person would do looking after their own business and act in good faith for the company and treat all shareholders equally. Directors duties include:
- A duty to act within powers – not to abuse or exceed their powers (usually as defined by the Articles) or use them for an improper purpose;
- A duty to act as the director considers will promote the success of the company for the benefit of its members as a whole, having regard (amongst other things) to:
- the likely long term consequences
- employees’ interests
- business relations with suppliers, customers and others
- impact on the community and the environment
- desirability of a reputation for high standards of business conduct
- need to act fairly as between members
This duty is made subject to any requirement to act in the interests of creditors (e.g. where the company is insolvent and wrongful trading might occur).
- A duty to exercise independent judgement
- A duty to exercise reasonable care, skill and diligence (this introduces a minimum standard of competence)
- A duty to avoid conflicts of interest – but conflicts can be authorised by the board (so long as there are enough “independent” directors)
- A duty not to accept benefits from third parties – they can still only be approved by the shareholders
- A duty to declare to other directors any interest in a proposed transaction or arrangement – a “general” notice can be provided at a board meeting dealing with ongoing transactions with a particular company.
A director must declare any potential conflict of interest and if they plan to enter into substantial deals with the company, they must be approved by the shareholders in a general meeting.
Other responsibilities of Directors
Apart from Companies House responsibilities directors are also responsible for the general running of the company such as complying with employment law, health and safety law, tax law, etc.
Failure to carry out some of these duties, such as where health and safety is concerned, can result in a criminal conviction.
Filing Documents at Companies House
Directors are responsible for filing documents at Companies House, even though such tasks may be delegated to the Company Secretary…
- Late filing of accounts leads to an automatic civil penalty, in the range of £150 to £1,500 for a private company, and £750 to £7,500 for a public company. Failing to file accounts or the annual return on time, or not at all, is also a criminal offence. If you are prosecuted and convicted you could end up with a criminal record and a fine of up to £5,000. You may also be disqualified from acting as a director.
- The Directors also need to check and return the annual return which is the information that Companies House holds on the directors, shareholders and so on.
- Ensure the company produces and files an annual report and accounts. A director must sign the balance sheet and the board must also approve and sign off the directors’ report. If required by law, an audit of the accounts must also take place.
- Advise Companies House if you change your registered office address, using form AD01.
- Advise of changes of directors and Company Secretary.
Disqualification of Directors
Directors can be disqualified for any of the following…
- allowing the company to trade while insolvent;
- not keeping proper accounting records;
- failing to prepare and file accounts
- not sending returns to Companies House;
- failing to send tax returns and pay tax
In some cases, the directors can face criminal charges, fines or be made personally liable for the company’s debts. Disqualification proceedings are handled by the courts and disqualification can be for between 2 and 15 years.
While disqualified, you must not: be a director of any company nor act like a director – even without being formally appointed influence the running of a company through the directors be involved in the formation of a new company ignoring a disqualification order is a criminal offence. For that you could be fined and sent to prison for up to two years.
Even if you haven’t been appointed as a director, you could possibly be a shadow director if the other directors are ‘accustomed to act’ under your instructions.This can also happen if you resign as a director but continue making decisions and giving instructions. In this case you would have the same responsibilities and potential penalties as if you were a director.
Failure to properly comply with director responsibilities can lead to the following penalties…
- You can be personally liable for illegal acts such as those beyond your powers.
- You can be liable for company debts incurred through fraudulent or wrongful trading. Wrongful (or even fraudulent) trading occurs when you allow the business to carry on and run up debts when you know or should know there is no reasonable prospect of the company being able to repay them. Just because you are making losses does not necessarily mean it is wrongful trading but all circumstances need consideration.
- If as a director you disagree with the decisions made by the board as whole you should ensure this is noted as you can still be joint and severally liable for decisions taken as a collective.
How we can help you
We can provide the advice you need to ensure you stay within the law. The legislation is not designed to penalise those that act honestly and in good faith. For further advice please contact us.