Being appointed a company director is a pretty big deal. Whether you’ve worked your way up through a business or taken the plunge and started your own, it’s a title that comes with a certain amount of pride.
But while being a director might sound impressive on a business card, there’s quite a bit more to it than having a say in how the company is run. Directors have legal responsibilities, and some of these might come as a surprise, particularly to those running smaller businesses who are used to making decisions as they go along.
The Companies Act 2006 sets out seven statutory duties for company directors, covering everything from acting in the company’s best interests and exercising independent judgement to avoiding conflicts of interest.
That might all sound a bit formal, but what do these duties actually mean in practice?
Keeping on top of the paperwork
Let’s start with the less exciting side of running a company, the administration.
Every limited company has certain legal obligations, and it’s the directors who are ultimately responsible for making sure they’re met. This includes filing annual accounts and confirmation statements with Companies House, keeping company records up to date and making sure corporation tax is dealt with correctly and on time. Changes to directors, the registered office or people with significant control over the business also need to be reported.
The good news is that directors aren’t expected to do everything themselves. Most businesses rely on accountants, solicitors and other professionals to help them stay on the right side of the rules. However, you can delegate the work, but you can’t simply hand over the responsibility. If something goes wrong, saying you thought the accountant was dealing with it is unlikely to get you off the hook.
Doing what’s right for the business
Company directors have a legal duty to promote the success of the company for the benefit of the business as a whole, rather than simply doing whatever suits them personally.
That might sound obvious, but it isn’t always straightforward in practice. For example, what happens if a director wants to award a contract to a friend’s business? Or use company money for something that benefits them personally? These are the sorts of situations where conflicts of interest can arise.
Directors are expected to act honestly, use reasonable care and judgement, and make decisions that they genuinely believe will benefit the business. They must also consider the wider consequences of their decisions, including the impact on employees, customers, suppliers, the community and the environment.
Nobody expects every business decision to be perfect. Directors are allowed to take commercial risks, and sometimes those decisions won’t work out. What matters is that decisions are made properly, with the right information and, importantly, for the right reasons.
Who is a director actually answerable to?
This is an interesting one, particularly for people who own their own businesses.
In a large company, there’s often a clear distinction between the shareholders who own the business and the directors who run it. Shareholders can question directors about performance, challenge decisions and, in certain circumstances, vote to remove them.
But in a small family business, the same person might be the director, the majority shareholder and the person who makes the tea. Does that mean the rules are different? Not really.
Legally, a director’s duties are owed to the company itself, whether the business employs two people or two thousand. A limited company is a separate legal entity from the people who own and manage it, so even if you own 100% of the shares, you can’t simply treat the company’s money and assets as your own. There are proper procedures to follow, and being the boss doesn’t mean you can ignore them.
Small business, same responsibilities
It’s easy to assume that some of these rules are really aimed at big corporations with boardrooms, shareholders and teams of lawyers. But a small limited company has many of the same legal responsibilities as a much larger organisation.
Accounts still need to be filed, records must be accurate and changes need to be reported. Miss a filing deadline and the company could face a financial penalty. Repeatedly fail to meet its obligations and things can become considerably more serious, potentially resulting in the company being formally struck off the Companies House register and no longer able to trade.
For many small business owners, this is one of the trickiest aspects of being a director.
You’re so focused on dealing with customers, managing staff and keeping the business going that the formalities can slip down the priority list. Unfortunately, Companies House and HMRC won’t necessarily see being busy as a good excuse.
What happens when things go wrong?
One of the main attractions of setting up a limited company is, of course, limited liability.
Generally speaking, the company is responsible for its own debts, rather than the directors being personally responsible for paying them. But that protection isn’t absolute.
If directors fail to meet their legal duties, they can face consequences personally. This becomes particularly important if a business starts experiencing financial difficulties.
For example, if a company is heading towards insolvency, directors need to take the interests of creditors into account. Continuing to trade without properly considering the financial position, or making decisions that worsen the situation, can create serious problems.
Depending on the circumstances, directors could face personal financial liability, disqualification from acting as a director or, in the most serious cases, criminal proceedings.
Of course, a business failing doesn’t automatically mean its directors have done anything wrong. Companies can run into trouble for all sorts of reasons, many of which are outside anyone’s control. The important thing is how directors respond when difficulties arise, rather than ignoring the warning signs and hoping everything will sort itself out.
A title worth taking seriously
Being a company director should be something to be proud of. It gives you the opportunity to shape a business, make important decisions and hopefully enjoy the rewards of seeing it succeed.
But it also comes with responsibilities that don’t disappear just because the company is small, privately owned or family-run.
The best approach is to understand those responsibilities from the outset, keep on top of the formalities and seek professional advice when something isn’t clear. After all, most people become company directors because they want to build a successful business, not because they want to spend their time worrying about Companies House deadlines or legal technicalities.
Whether you’re already a company director or hoping to become one, it’s worth taking a little time to understand exactly what the role involves. After all, there’s quite a bit more to it than an impressive job title.
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
