You’ve been invited to become director of a company. You know all the other directors and the company appears successful. What an honour – should anything stop you from accepting?
Wait a minute before you take the plunge.
Directors have extensive duties imposed on them under UK law and can be personally liable if those are breached. Even if you become a non-executive director with little involvement in the day-to-day running of the company, these duties will apply to you. From a company law perspective, you will be a director and your part-time status or ignorance of certain areas of the business are irrelevant.
If that isn’t scary enough, you’ll also be responsible for ensuring that the company complies with its various legal requirements, such as filing accounts and returns at Companies House.
Are the alarm bells ringing in your head yet?
Before you decide whether you want to take on an appointment such as this, you have to understand what exactly the duties of a director are. The Companies Act 2006 sets out that every director has a duty to:
- Act within their powers;
- Promote the success of the company;
- Exercise independent judgment;
- Exercise reasonable skill and care and diligence;
- Avoid conflicts of interest;
- Not accept benefits from third parties; and
- Declare the nature and extent of any interest in a proposed transaction or arrangement.
There is not space in this article to explore the details of each of duty, but even a superficial reading of these headings should emphasise that much will be expected of you. It should also make clear the principal distinction between being a director and a shareholder. Shareholders are allowed to act in their own self-interest, whereas directors always have to consider their duties and act in the best interest of the business. It’s important not to confuse the two roles blurring the lines between them is a common problem in companies.
In terms of complying with your duties, there are some classic examples of potential problem areas. For example, when a director takes up a directorship within another company in a similar industry, or wants to exploit an opportunity that the company has previously turned down. Don’t make the mistake of assuming that you are free to do either of these things, otherwise you might find that you have breached your duties.
In addition to duties under the Companies Act, directors can also incur personal liability under other legislation, such as health and safety and bribery law.
What happens if I don’t comply?
Unfortunately, your legal duties are non-negotiable. By breaching them you will be held personally liable, which could prove costly. For this reason, check whether the company has adequate directors’ and officers’ liability insurance in place before you agree to become a director.
This sort of policy is designed to protect directors from claims, but, as with any insurance policy, the devil is in the detail make sure you understand and are comfortable with the circumstances that the policy covers.
Your liability might not be limited solely to financial penalties. If you have done something which is deemed negligent or incompetent (for example, failing to follow health and safety regulations, or committing the offence of wrongful trading) then you could also be disqualified from being a director for a period of time or, in the most serious cases, held to have committed a criminal offence.
Even if you do nothing wrong, your professional reputation could suffer as a result of your directorship. Your company could go bust through no fault of the directors (for example, where its major customer goes bust owing it substantial sums). In these circumstances, just as your company was dragged down by another firm, it too may drag others down with it and, in all likelihood, the people behind these companies will blame you.
If this all sounds like I’m spreading doom and gloom, then forgive me – but it’s important to think long and hard before assuming a directorship. Many directors lead their role without having any issues at all and find it rewarding, both professionally and financially.
The key to making the decision about whether to accept a directorship is to make sure that you do your research in advance, so you understand both the company and the wider industry before you commit to it. If you are in any doubt about what will be expected of you and whether you could fulfil your duties, then you should seek professional advice. This will give you the reassurance that you understand your responsibilities and let you concentrate on making your directorship, should you decide to accept it, a success.
Stephen Smith is a solicitor in the corporate team at law firm Brodies LLP.