What does being a director of a limited company involve?

Being a director of a company is a huge responsibility.

Not only does being a director grant a person the right to be involved in the day to day running of the business, but it also confers many responsibilities and duties, not only to the shareholders of the company, but also its' creditors, which if breached can potentially (in some circumstances) incur personal liability on the directors.

Company directors are appointed by and are answerable to the shareholders (owners) of the company.  However, as a result of the Companies Act 2006, company directors responsibilities are now specified in law (these new statutory duties of company directors are set out in Part 10 of the Companies Act 2006).

As well as these legal responsibilities, being a company director brings with it several other important directors responsibilities, such as the day to day running of the business, duties to employees (including health and safety), making purchases and entering into credit arrangements on behalf of the company, and ensuring certain documents are submitted on time to the Registrar at Companies House.

The Companies Act states that the role of directors is to act in a way which they consider most likely to promote the success of the company for the benefit of its shareholders as a whole and that, in doing so, they will need to have regard where appropriate to long term factors, the interests of other stakeholders and the community, and the company's reputation. There is particular focus on the area of conflicts of interest.

There are now several general duties specified at law as forming part of a company director's role.  Company directors must:

1. Act within their powers and in accordance with the company's constitution

2. Promote the success of the company for the benefit of shareholders, paying due regard to:
a. the likely consequence of any decision in the long term
b. the interests of the company's employees
c. the need to foster the company's business relationships with suppliers, customers and others
d. the impact of the company's operations on the community and the environment
e. the desirability of the company maintaining a reputation for high standards of business conduct

3. Exercise independent judgment

4. Exercise the reasonable care, skill and diligence that would be expected by a person in that position in a company of that size (eg an experienced non-executive director would have higher standards expected of them than a more inexperienced executive, but there is a minimum expectation of any director).

5. Avoid conflicts of interest, including conflicting multiple directorships

6. Not accept benefits from third parties.  Note that this does not necessarily include a director receiving a benefit from a person or company which provides services to the company. A more difficult area is the giving or receipt of corporate hospitality so it's often advisable to put a policy in place regarding the limits on what can be received.

7. Declare interests in proposed transactions or arrangements.  Note that a director may not necessarily be party to the transaction or arrangement to be 'interested' in it.

Furthermore, in certain instances a director may be guilty of an offence known as "wrongful trading", which could potentially incur personal liabilities on a director.

Wrongful trading occurs when the directors of a company have continued to trade a company past the point when they:

(a) "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation"; and
(b) they did not take "every step with a view to minimising the potential loss to the company's creditors".

If you are a Director, or have been asked to become a Director, please do not hesitate to call our Business Law Team for further advice.