Posted: Wednesday, 4 June 2014 @ 11:20
What Is a Director?
Simply put, a director is someone who runs a company. They are responsible for leading, directing, overseeing, supervising, governing and controlling the company.
Often a company will also have advisors, such as accountants, solicitors and business consultants of different specialities but these advise the directors rather than make important decisions themselves. Advisors are not directors unless they are authorised to make important company decisions themselves.
A director can be another company but there must be at least one human director.
Generally speaking, there are three classes of directors. In law, they are all treated the same and have the same rights and responsibilities.
The first class is someone who has been appointed a director and whose name appears in the company’s registers. Such a person should also be registered at Companies House as being a director.
The second class is someone who acts as a director even though they have not been officially appointed. If they run the company and make important company decisions, then they are treated as a director even if they do not appear in the company’s registers. These are referred to as “shadow directors”.
The third class is someone who holds themselves out as a director even though they have not been officially appointed. For example, if the head of sales refers to himself as the ‘Sales Director’, then he can be treated the same as a properly authorised director.
Why Does It Matter?
Directors have a range of duties and responsibilities that they must comply with. These do not just relate to officially appointed directors but to shadow directors and those who hold themselves out as directors too.
Some duties are set out in various Acts of Parliament (notably the Companies Act and Insolvency Act) and are known as ‘statutory duties’.
These include duties to act within the company’s powers; to promote the success of the company; to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; to formally declare interests in certain transactions and arrangements, and to safeguard the interests of creditors if the company is insolvent.
There are also other duties, generally known as ‘fiduciary duties’ and some of these overlap with the statutory duties. These include duties to act in good faith in the best interests of the company; to exercise powers for a proper purpose; not to put yourself in a conflict of interest; not to make a personal profit form opportunities that result from being a director; and to exercise skill and care.
Some duties are set out in criminal law (a director can be punished for crimes committed by the company) or commits crimes by failing to comply with certain Companies Act requirements such as filing documents with Companies House or sending accounts to shareholders.
If a director breaches any duties, they can be held liable to compensate the company from their personal assets. Sometimes, they can be disqualified from acting as a director in any company. In criminal cases, a director can be fined or even sent to prison in serious cases.
When Does It Matter?
If things are going well, it’s unlikely that anyone will do anything about breaches of duties.
However, breaches of duties generally come to light in the following cases:
- When directors or shareholders fall out;
- After a director leaves;
- If the company goes into liquidation;
- If the company is sold.
If any of these events happen, the company can look back over several years for breaches.
What Can Be Done?
In many cases (but not all), breaches of duties can be authorised by the shareholders even ones that occurred in the past.
If you are worried about whether a breach of your duties could come back to bite you and whether you can protect yourself, it is best to take legal advice. You should do so before you sell the company or before it becomes insolvent.
Also, if you are a director or shareholder of a company and are concerned about the actions of a director, you should take legal advice about what can be done.
Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
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