Publications - Corporate



			Publications - Corporate Duties and Liabilities of Directors of Private Companies Introduction The aim of this note is to provide a basic explanation of the main responsibilities and liabilities of directors of UK private limited companies. The information in this note is not exhaustive and not sufficiently detailed to apply to the circumstances of any particular situation. Types of director Although a company is a legal person in its own right and as such can own property and enter into contracts with others, it can only make decisions through those that own or control it. The day to day management of a company is usually entrusted to its directors. As a general rule if a person acts as a director, the law treats him or her as a director (a "shadow director") even if he or she is not called a director and has not been formally appointed as a director. A director is an officer of the company but not automatically an employee. Where a director is also a full-time employee he or she is often referred to as an "executive director". A "non-executive director" is usually part-time and is often appointed for his or her specialist knowledge and experience and/or to provide the board of directors with an impartial opinion. Fiduciary duties The principal fiduciary duties of a director, which are owed to the company, require that he or she:- acts in good faith and in the interests of the company; acts for proper purposes; acts as trustee of the company's assets; avoids conflict between the director's personal interest and his or her duty to the company. discloses all personal interests in contracts or arrangements with the company; and does not make secret gains or profits. Duty of skill and care Directors must use reasonable business judgement in deciding what is in the best interests of the company (including its present and future shareholders, employees, customers and creditors). In doing so a director is required to show such skill and care as may reasonably be expected from a person with his or her knowledge and experience. A director is not expected to have skills he or she does not in fact possess but an expert director with a professional background is expected to show greater skill than a director has no such expertise or experience. These standards apply to all types of director identified earlier in this note. Fair dealing A number of statutory provisions are aimed at ensuring that directors do not take financial advantage of their position. These include:- disclosure obligations in respect of directors interests in the shares and debentures of the company or any group companies; a requirement that directors disclose interests in contracts or proposed contracts with the company; a requirement that certain transactions involving directors or connected persons and the transfer of non-cash assets to or from the company be approved by shareholders; a requirement that director's service contracts (or a note of their terms) be open to inspection; a requirement that directors service contracts capable of being for more than 5 years be approved by shareholders; a bar on directors receiving tax free remuneration; a requirement that any payment in compensation for loss of office or on retirement be approved by shareholders; and restrictions on a company making loans to or providing guarantees or security for loans made to a director or connected persons. Statutory Responsibilities Directors are also responsible for ensuring that the company they manage complies with all relevant legislation. Non-compliance may result in fines, disqualification or even imprisonment. The main statutory responsibilities include:- Accounting Records; maintaining and keeping proper accounting records which correctly reflect the company's transactions and financial position. Annual Accounts; preparing or overseeing the preparation of annual accounts of the company together with reports and notes. These may need to be audited and must be made available to members and filed with the Registrar of Companies within 10 months from the end of the company's financial year. Tax; complying with tax legislation eg. the directors are responsible for the company's compliance with VAT regulations. Statutory Books; maintaining various registers which are usually kept at the company's registered office including a register of directors and secretaries, a register of directors' interests, a register of members and a register of security given by the company. Returns; filing an annual return and other standard forms with the Registrar of Companies detailing specific information about the company and its shareholders and giving notice of specific events. Meetings; ensuring that the board meets sufficiently often to allow it to discharge its duties and that the company holds an annual general meeting of shareholders within prescribed time limits. Company name; ensuring that the company's name is evident on all letters, notices, invoices and all other correspondence including cheques and displayed outside every office. Letters must also give the full address of the registered office of the company, its full name, registered number and country of incorporation. If any director's name is stated, the names of all directors must be stated. Creditors; considering the position and interests of creditors when the company is insolvent or is close to insolvency. General Liabilities These may fall into the following categories:- Abuse of power; A director may be liable if he or she acts outside the stated purposes (the "objects") of the company set out in its Memorandum of Association or if he or she uses any powers vested in him or her by the Memorandum and/or Articles of Association of the company (its constitutional documents) for purposes other than those for which they were given. Breach of Duty; If a director is in breach of any of the duties imposed upon him or her, he or she may be personally liable to account to the company for any personal profit or gain or to reimburse the company for any resulting loss. Liabilities to Shareholders; A director may be personally liable to shareholders if he or she breaches his or her duties. For example a director is guilty of a criminal offence if he or she publishes an account of the company's affairs knowing that the account is or may be false, misleading or deceptive, with intent to deceive the shareholders or creditors. Liabilities to Investors; Before a director may carry out investment business he or she must be authorised to do so under the financial services legislation. Any transaction entered into by an unauthorised director is unenforceable and any investor who suffers loss may be able to obtain compensation from the director personally. Wrongful Trading; Wrongful trading is not a criminal offence but can apply to a director of a company which is in insolvent liquidation if, before the start of the winding up, he or she knew or should have known that there was no reasonable prospect of the company avoiding an insolvent liquidation. A director who has wrongfully traded can be required by the court to make a financial contribution to the assets of the company. A wrongful trading action can be successfully defended if the director concerned can show that when he or she realised matters were irrecoverable he or she took every step to minimise the loss to creditors that he or she ought to have taken. It is not enough that the director had no knowledge of or did not appreciate the seriousness of the company's financial situation, that the director acted honestly and reasonably and ought fairly to be excused, that the director resigned before the liquidation or that he or she was otherwise unable to cope with the duty of his office. Fraudulent Trading; As its name suggests, fraudulent trading is more serious offence than wrongful trading and can give rise to both civil and criminal liability. A director may incur personal liability for fraudulent trading when, in the course of winding up, it appears to the liquidator that any business of the company has been carried on with intent to defraud the creditors. This may include a situation where a company has continued to incur debts at a time when, the directors knew, that there was no reasonable prospect of those debts being paid. Disqualification A disqualification order issued by a court may ban an individual not only from acting as a director of a company but also from acting as a liquidator, receiver or manager of a company's property and from having any connection with the setting up or management of a company without the permission of the courts, for up to 15 years. A person who breaches such an order commits a criminal offence punishable by imprisonment or fine or both and may be made personally liable for any debts of the company in respect of which he or she acts. A director's disqualification may arise from misconduct, unfitness, participation in wrongful trading and/or other grounds. Misconduct; This includes:- conviction of an indictable offence committed in connection with the setting up, management or liquidation of a company, or with the receivership or management of its property. The maximum period of disqualification that may be imposed under this head is 15 years. being guilty of fraudulent trading or any other fraud in connection with a company. The maximum period of disqualification that may be imposed under this head is 15 years. being guilty of persistent breaches of Companies Acts requirements to file any returns, accounts or other documents with the Registrar of Companies. The maximum period of disqualification that may be imposed under this head is 5 years. conviction of a summary offence relating to Companies Acts requirements to file returns, accounts or other documents. The maximum period of disqualification that may be imposed under this head is 5 years. Unfitness; A director may be disqualified if found unfit to hold office. This potential liability arises out of the procedure whereby every liquidator, administrative receiver and administrator is obliged to report to the Secretary of State a person who is or has been a director of the company with which he is involved and who appears unfit to be a director. Factors may include:- responsibility for the company's failure to meet its statutory responsibilities. misfeasance or breach of the fiduciary or other duty; misapplication or retention by the director of any money or other company property; responsibility for transactions designed to defraud creditors; and and where a company is insolvent: the responsibility of the director for the insolvency; the responsibility of the director for any failure by the company to meet orders paid for in advance; the responsibility of the director for the company entering into transactions which may be set aside on the liquidation; any failure to comply with the requirements relating to the first meeting of creditors in a voluntary winding up; any failure to comply with an obligation relating to a statement of affairs in the winding up; or any failure in a duty to co-operate with a liquidator. Other Grounds; These include where a director has participated in fraudulent or wrongful trading and where he or she is an undischarged bankrupt who participates in the management of a company without the consent of the Court. Written July 2001. Reviewed January 2002. For further information please contact : corporate@mcgrigors.com «Back to Corporate Publications				«Publications McGrigors' lawyers produce a variety of publications to help keep clients up to speed with legal developments in their industries. You can select the areas most relevant to you on the left and you can register for email updates to make sure you don't miss out.