The challenges for Directors' pay in 2011

Posted: Tuesday, 4 January 2011 @ 09:56

As we enter 2011, one thing is for sure: company directors have never before faced so many duties, responsibilities and potential personal liability for the companies they control. Based on recent trends, we predict that the following 4 areas will be the main ones for directors of SMEs to watch out for in 2011.

Directors Pay

The law on how and when a director can be paid is complex and there are strict procedures that must be followed. We have seen a large increase recently in the volume of claims made against directors for them to pay back remuneration and dividends, and this is set to continue.

Most problems are caused by the common practice of a director being paid drawings during the year and then declaring a dividend at the year-end to cover this. There are rules and procedures for overdrawing loan accounts and declaring dividends and, if these are not strictly followed, up to 6 years’ worth of dividends might have to be repaid to the company.

Advice:

  1. Make sure you are following the rules and procedures. If your accountant can’t give you definite answers, take legal advice. 
  2. If you fear that your company might become insolvent within the next 12 months, take legal advice to safeguard your position. In many cases, simple steps can be taken that will avoid liability if the worst happens and your company goes into liquidation or administration. 
  3. If a claim has been made against you, take legal advice as soon as possible on how best to negotiate with the liquidator, administrator or new company owner. Not taking action quickly enough will usually result in you having to pay far more than you would have otherwise.

Director or shareholder disputes

It is a fact of life that directors and shareholders will sometimes fall out with each other and, during these difficult times, this is happening more frequently. The problem is made far worse however where no one party has overall control of a company and there is no agreement in place setting out how disputes can be resolved or when a director can be removed for misconduct.

Generally speaking, directors can only make decisions regarding themselves if the majority agree, and a director can only be removed by the majority of shareholders. Needless to say, setting up a company with, say, two directors each with 50% of the shares just sets up a stalemate situation if there is a conflict. This is a recipe for disaster unless you have a specific agreement in place.

Advice:

  1. Wherever possible, avoid setting up a company where no particular shareholder, or group of shareholders, has overall control. 
  2. Where this is unavoidable, make sure you reach agreement at the outset as to what will happen if you can’t agree on serious matters. Have your Articles amended to reflect this and get a shareholders’ agreement drawn up too.

Liability for costs in litigation

If your company finds itself involved in a court case, you must be particularly careful where you are a small company. The general rule in litigation is that the losing party pays towards the winner’s costs and, if the loser is a company, this payment comes from the company’s coffers.

However, the courts are becoming keener to order company directors of small companies to pay the winning party’s costs personally in certain circumstances. If a director stands to gain from the litigation, controls and funds it (and this is often the case in small companies where the company is effectively the trading vehicle for a director), then the courts may well order them to pay personally.

Advice:

  1. When faced with the prospect of a court case, take legal advice as soon as possible not only on how good a case you have and how best to present it, but also on how to fund it to reduce the risk of personal liability.

Bribery

The new Bribery Act 2010 comes into force this April. This introduces the following criminal offences:

  • Making a bribe. 
  • Accepting a bribe. 
  • Bribing a foreign public official in order to win or retain business. 
  • Failing to prevent bribery by employees, agents or subsidiaries. It is a defence here to show that the company has adequate procedures in place to prevent persons associated with the company from paying bribes.

Advice:

  1. Consider where bribery might be an issue for your firm. 
  2. Draft a written policy to avoid bribery and make sure it is distributed to all employees, agents and subsidiaries. The policy should at the least make it clear that bribery is unacceptable and that disciplinary measures will follow if there is any bribery. It should also set out a gifts and hospitality policy. Training on the policy should be given (depending on the size of the organisation).

It’s not easy being a director but you can prepare yourself and by taking professional advice at an early stage protect yourself too.

Gary Cousins
Cousins Business Law

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
Call Gary on +44 (0)121 778 3212 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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Thank you. Your response is great, very straight to the point! Hopefully this will bring an end to the matter. I will certainly be recommending your services as I am very impressed with the prompt dealing of this matter.
Janet Burbidge

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