Becoming a director
Read time : 6 mins Added: 24/05/2023
Becoming a director of a limited company can be very satisfying, bringing with it a high level of responsibility and trust. But you’ll need to follow statutory rules and duties, and there can be legal consequences if you fail to do so. We take a closer look at this role, what is involved and how to meet the legal responsibilities.
What is a director of a company?
Directors are legally responsible for running the business and ensuring company accounts and reports are properly prepared. Sometimes they are appointed, but if you’ve set up your own limited company, you will already be a director.
There are a number of duties that apply to all company directors. However, the full remit is specific to each individual business and set out in their Articles of Association (the rules relating to the running of the company). So, before becoming a director, you should seek legal guidance regarding your obligations and the risks involved.
Overall responsibilities
As a director, your main role is to ensure that the business follows its constitution as set out in the Memorandum and Articles of Association. Your other responsibilities can be summarised as follows:
- You should drive the company's success for the benefit of everyone involved: employees, suppliers, customers and the local community.
- You should carry out your duties with reasonable care and skill. That includes applying your specialist knowledge compared to other executive directors. This may happen if there's an area in which you have a lot of experience or a professional qualification.
- You must exercise independent judgement with no conflict of interest and duty. This means disclosing to the company any personal interests that you have. You may then be barred from voting on any related matters. You must also avoid diverting 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.
Legal obligations
You must carry out the statutory obligations set out in the Companies Act 2006 and other legislation. In doing so, you should remember that 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
It should go without saying that you must never use the director’s role to:
- Take bribes or any other benefit from a third party.
- Act fraudulently, including the intention to defraud creditors.
- Engage in wrongful trading, such as allowing the company to carry on trading when you know (or ought to know) that it is insolvent.
Who can become a director?
Most people can become a director, but there are exceptions, including:
- Anyone disqualified by the company's own Articles of Association.
- Undischarged bankrupts.
- Anyone disqualified by a court order.
- The company’s auditor.
If you are acting as a director, even without the title, you may still legally be seen as a director. This could apply to a lawyer or accountant who advises you. In this case, they could be seen as a 'shadow' director.
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 a director's service contract. Ideally, this should be registered, and a copy kept for inspection at the company's registered office.
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. So, non-executive directors need to keep fully informed about the state of the business, even if they are not involved in its day-to-day running.
Duties of a director
Financial administration
Prepare and sign accurate accounts and file them with Companies House. For small and medium-sized businesses, unaudited abbreviated accounts are sufficient.
File a confirmation statement with Companies House. This confirms that the information they hold about your company is up to date. You should also let them know of any changes.
Dealing with capital
As a director, you are in a position of trust and must act with integrity at all times for the benefit of the company. Always take advice before buying or selling any assets from or selling them to the company. Remember, you may need your shareholders’ approval first.
If a director profits personally from their position, even if the company is unharmed, 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.
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 action to support the best interests of the company. These aren’t always to the benefit of shareholders.
Avoid fines and conflicts of interest by making sure you fulfil your legal obligations.
These include:
- Complying with the Companies Act 1985, the Financial and Services Act 2000 and the company’s Articles of Association when issuing shares.
- Asking your accountant's advice before borrowing from the company and checking you understand the strict legal limits beforehand.
- Preparing and signing accurate accounts and strategic reports. There’s no requirement to circulate these at an annual general meeting anymore unless shareholders request it.
- Annually filing your confirmation statement (previously known as an annual return) with Companies House and informing them of any changes.
- Acting honestly and reasonably if you hold more than just your role as director in the company, such as owning shares or guaranteeing loans.
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 in the Companies Act 1985, or you can set out your own.
Find out more about these documents, including examples, by visiting: gov.uk/limited-company-formation/memorandum-and-articles-of-association.
Personal and Limited Liability
Directors can be personally liable for the financial consequences of fraud, negligence or a breach of trust in the company. One option is to get personal liability insurance, but you should always check your policy for exclusions.
This insurance is often required if you are self-employed and working as a contractor or 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.
You could also consider Directors and Officers (D&O) liability insurance. Directors don't usually have personal liability for the company's debts. But creditors may claim from you personally if losses arise from wrongful or fraudulent trading.
Wrongful trading
This is where a company finds itself in financial trouble yet carries on trading, incurring debts and losses to creditors. At some stage on the path to liquidation, there may have been a 'point of no return.' If you can be shown to have recognised this and not acted, you may be considered personally responsible.
That’s why, as a director, you should always remain aware of the company's financial status and must ensure that someone competent monitors its solvency.
If you’re a director, you can be cleared of this liability. However, you’ll need to satisfy a court that on realising the company was irrecoverable, you took reasonable steps to minimise creditors’ losses.
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 were kept.
If you are successfully sued for damages, you may claim a contribution from anyone else who is also found to be responsible.
Resigning as a director
If your company reaches the ‘point of no return,’ you may feel tempted to resign your position as director. But this won’t always free you from your obligations and liabilities unless you made sure the company took all possible steps to recover, including seeking professional guidance.
You must be seen to have taken positive steps to ensure that the scale of the company's problems was brought to the attention of the full board of directors.
To formally resign from your directorship for any reason, you should complete form TM01 with Companies House.