Becoming a director
Becoming a director of a limited company can be very satisfying, bringing with it a high level of responsibility and trust. You’ll need to follow statutory rules and duties and there can be legal consequences if you fail to keep them. We take a closer look at the role and responsibilities of directors of limited companies, and how to make sure you keep within the law.
1. Who can be a director?
Know the essentials
- Most people can become a director, with a few exceptions.
- If you act informally like a company director, you might still be legally seen as a director and liable for your company’s performance.
- There’s no legal difference between executive and non-executive directors.
Learn the details
Most people can become a director, unless:
- They are disqualified by the company's own Articles of Association (the rules relating to the running of the company).
- They’re an undischarged bankrupt.
- They’ve been disqualified by a court order.
- They are the company’s auditor.
You don't have to be a company shareholder or employee as well. But if you do any full-time or part-time work for the company you may need to have a director's service contract. You might need to register this, and keep a copy for inspection at the company's registered office.
If someone acts as a director, even without the title, they may still legally be seen as a director. This could apply to a lawyer or accountant, who advises a company's directors and whose guidance the directors usually take. They could be seen as a 'shadow' director.
Non-executive directors take a less active role in managing the company. But, the law makes no distinction between the responsibilities of executive and non-executive directors. This means non-executive directors need to keep fully informed about the state of the business, even if they’re not involved in the day-to-day running.
2. Director’s duties
Know the essentials
- A director’s remit should be clearly detailed in the Articles of Association, tailored to be specific to the company.
- There are standard duties that directors of all companies must carry out.
- Directors can become personally liable under the law.
- Always take advice before buying or selling assets and remember you may need approval from your shareholders.
Learn the details
The extent of the directors authority depends on the company's Articles of Association. So before you become a director, it’s best to take legal guidance on what the extent of your obligations will be. You should always take your duties seriously as failing to meet your obligations can have serious legal consequences.
There are a number of duties that apply to all company directors, including:
- Ensuring the company follows its constitution as set out in the Memorandum and Articles of Association.
- Acting in good faith to promote the success of the company for the benefit of its members. You must also take into consideration employees, suppliers, customers, the environment and the community.
- Carrying out your duties with reasonable care and skill. You might be expected to apply your specialist knowledge compared to other executive directors if there’s a relevant area you have a lot of experience or a professional qualification in.
- Making sure that there is no conflict of interest and duty, and to exercise independent judgement.
- Disclosing to the company any personal interests you do have. You mustn’t divert business opportunities to yourself that could be available to the whole company.
- Making a declaration of interest if appropriate. You may not be allowed to vote on matters if there is a conflict of interest.
- Never using your appointment as a director to take bribes, seek or gain benefit from a third party.
- Never acting fraudulently, including with the intention of defrauding creditors.
- Not engaging in wrongful trading, which means allowing the company to carry on trading when you know (or ought to know) that it is insolvent. This can lead to personal liability.
- Carrying out the statutory obligations set out in the Companies Act 2006 and other legislation.
Remember, some parts of the law make directors personally liable for certain actions they may take, including:
- The Insolvency Act 1986 which can lead to personal liability where directors allow the company to trade wrongfully or fraudulently.
- The Health and Safety at Work Act 1974.
- Laws relating to the control and disposal of hazardous waste.
3. Dealing with capital
As a director, you’re in a position of trust and you should act with integrity at all times for the benefit of the company. Always take advice before buying or selling any assets from or to the company and you’ll usually need your shareholders’ approval. If a director profits personally from their position, even if the company hasn’t suffered as a result of their actions, a court could order them to pass on any profits to the company.
Directors can only distribute the company’s profits after tax through taxable dividends according to the rules in the Articles of Association.
Know the essentials
- Directors, with the support of accountants and auditors, are responsible for ensuring accounts are complete and filed with Companies House.
- You must consider all stakeholder interests and take actions to support the best interests of the company – these aren’t always to the benefit of shareholders.
- Keep all your paperwork in a safe place and in good order.
Learn the details
Avoid fines and conflicts of interest by making sure you fulfil your legal obligations, including:
- Filing your accounts and providing information on shareholders and directors with Companies House.
- Act honestly and reasonably if you hold more than just your role as director in the company, such as owning shares or guaranteeing loans.
- Complying with the Companies Act 1985, the Financial and Services Act 2000 and the company’s Articles of Association when issuing shares.
- Always ask your accountants advice before borrowing from the company and check you understand the strict legal limits for this first.
And make sure you know what you have to do with your company accounts, asking your accountant for the correct advice for your business:
- Prepare and sign accurate accounts and strategic reports. There’s no requirement to circulate these at an annual general meeting anymore, unless asked to by the shareholders.
- Annually file your confirmation statement (previously known as annual return) with Companies House, letting them know of any changes.
- For small and medium-sized businesses, unaudited abbreviated accounts can be filed at Companies House.
- Keep all paperwork safe.
- Make sure you keep petty cash records, bank paying-in counterfoils, goods in and out records and all company records such as personnel details for six years.
- Keep all earnings summaries for twelve years.
- Keep registers of directors and secretaries, applications for share documents, pension fund investment details, corporate balance sheets and minutes of general meetings permanently.
4. Memorandum and Articles of Association
- The Memorandum of Association, filed with Companies House, should contain the company’s name, registered office and objectives.
- The Articles of Association outline the rules about how the company will be managed. These can be the standard ones set out in the Companies Act 1985, or the board can set out its own.
You can find out more about these documents and examples by visiting gov.uk/limited-company-formation/memorandum-and-articles-of-association.
Directors could be personally liable if there is fraud, negligence or a breach of trust in the company. Personal liability insurance can help protect you from financial consequences but always double-check your policy for exclusions. This insurance is often required if you are self-employed and working as a contractor, as the single director and employee of your limited company. Company directors are often asked to give personal guarantees for loans , overdrafts and other financial liabilities, which could have implications. Think carefully before you agree and always ask for professional advice first.
A company’s limited liability protects directors and shareholders, except when they have contributed capital to the company, or can be called upon to do so – for example, with partly paid shares. If the company gets into financial difficulties, seek professional guidance immediately.
While directors normally have no personal liability for the company's debts, there are situations where it may be possible for creditors to claim from you personally, for example where losses arise from wrongful or fraudulent trading.
You could also consider directors and officers liability insurance.
The majority of private companies no longer need to hold an annual general meeting (AGM). If your company has traded shares then you must still hold an AGM. You’re not legally required to hold board meetings for directors, but it is good practice. The purpose of these meetings is to direct the company, not to manage it. Make sure that all directors are given reasonable notice to attend board meetings.
A directors contract of employment is usually approved in general meetings, particularly if the term of employment could be longer than two years. Always appoint someone to take accurate minutes for these meetings. At the next board meeting the minutes will need to be published and approved. Record all points raised in meetings in the minutes, whether a motion is carried forward or not.
6. Wrongful trading
If a company finds itself in financial trouble and carries on trading, incurring debts and losses to its creditors, this is known as wrongful trading. Any director who should have recognised the "point of no return" before it had been reached, can be held personally liable for the debts if the company then goes into liquidation. All directors must therefore be aware of the company's financial status and ensure that someone competent monitors its solvency.
Directors can be cleared of this liability if a court is satisfied that, when the director realised the company was not able to recover, they took reasonable steps to minimise potential losses to creditors.
Factors that may help support a court view that you acted properly include making sure:
- the board was properly constituted
- board meetings took place with detailed agendas of what was to be discussed
- board meetings were properly minuted
- proper management information was provided and records kept.
If you are successfully sued for damages, you may claim a contribution from anyone else who is also found to be responsible.
7. Resigning as a director
If your company reaches the "point of no return", you may feel tempted to resign. But you won’t necessarily be free from your obligations and liabilities as a director:
- you must be seen to have taken positive steps to ensure that the scale of the company's problems is brought to the attention of the full board of directors;
- you should ensure that the company takes all possible steps to recover, including seeking professional guidance.
Directors are not automatically disqualified from being directors of other companies because one company they worked for went into liquidation. Only a court can order disqualification.
To formally resign from your director duties for any reason, you can complete form TM01 with Companies House. Visit here for more information gov.uk/government/publications/terminate-an-appointment-of-a-director-tm01.
Important legal information
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